Summer is nearly over, but volatility is not - what's changed and what hasn't

DEWITT, Mich. - Aug. 30, 2022 - PRLog -- Stocks have made a less-than-pleasant round trip this summer. Major indexes entered a bear market in June, rebounded sharply in July, and are on track to finish flat in August, returning to where they were three months ago. Because some of the worst-case-scenario risks have recently diminished, we think the direction of travel since the midsummer lows is justified. But strong headwinds to growth will remain, which is why we continue to expect a more bumpy and prolonged market recovery to the prior highs. With the Fed's Jackson Hole meeting marking the last major market event before the summer ends, we take a look at what's changed, what hasn't, and what the evolving conditions may mean for the road ahead.

1. What's changed? Growing signs that the peak in inflation is behind us

• The inflationary pressures that the economy is facing appear to be receding, which is why we think the negative outcomes have lessened some since June, helping sentiment improve. Company surveys and real-time indicators suggest that the supply constraints are easing, while at the same time demand is weakening.

2. What's changed? After reaching its neutral policy rate, the Fed can start to slow the pace of tightening

• Recognizing that policy was behind the curve, officials have hiked aggressively this year. The series of rate hikes (0.25% in March, 0.5% in May, 0.75% in June, and 0.75% in July) has brought the fed funds rate to 2.25% - 2.50%, a range that policymakers consider as neutral – neither stimulating nor restraining growth¹. If the Fed were to stop raising rates now, this would be the fastest tightening cycle of the past 40 years, delivering the same magnitude of rate hikes as the average of the past five Fed cycles, and doing so in just five months vs. the average of 21 months since 1985².

3. What's changed? Economy is slowing but has stayed more resilient than feared

• The economy continues to slow, as tighter financial conditions and price pressures weigh on activity. Yet the consumer - the engine of the U.S. economy - is in decent shape and continues to spend.
• The first revision for second-quarter GDP showed a smaller contraction in the economy, mostly reflecting stronger consumer spending. Consumption expanded 1.5% after adjusting for inflation, driven by a 3.6% annualized increase on services¹. And personal income rose in July, supported by a tight labor market. However, some cracks are starting to appear, as suggested by the upward trend in jobless claims, as well as the declines in the job openings and quit rates.

Sources: 1. Bloomberg, 2. FactSet, Edward Jones