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Stocks took a plunge Friday as a favorable reading on inflation did little to offset the hawkish tone struck by Fed Chair Jerome Powell in a much-anticipated speech.
Ahead of the opening bell, data from the Commerce Department showed that the personal consumption expenditures (PCE) index – the Fed's preferred measure of inflation that tracks consumer spending – was up 6.3% year-over-year in July, slower than the 6.8% rise seen in June. On a month-over-month basis, the index fell 0.1%. Core PCE, which excludes volatile energy and food prices, was up 4.6% year-over-year and 0.1% month-over-month – both figures below what was reported last month and what economists' were expecting.
But one or two data points does not make a trend, as Powell indicated in his mid-morning speech at the central bank's annual symposium in Jackson Hole, Wyoming. "While the lower inflation readings for July are welcome, a single month's improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down," Powell said, while signaling that more rate hikes are needed to bring inflation down. And while these efforts will likely cause "some pain to households and businesses" as hiring and spending slow, "a failure to restore price stability would mean far greater pain," he added.
"The speech frankly tilled little new ground, acting more as a cudgel against those looking for a fast pivot, a blink or rate cuts in 2023," says Douglas Porter, chief economist at BMO Capital Markets. "Arguably the most telling line from Powell's remarks was: 'The historical record cautions strongly against loosening policy prematurely.' In a nutshell, Powell pounded the theme home that there is still work to be done and the job will take time."
"Continuous inflationary risks dwarf the recent indicators of an impending economic slowdown," says Johan Grahn, head of ETF Strategy at investment management firm AllianzIM. The Fed chair had to remain steadfast in his hawkish stance during today's speech, given his "previous comments about the Fed's unconditional commitment to preventing a transition into an inflationary regime," Grahn adds.
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Investors hit the exits en masse after Powell's speech. All 11 sectors ended the day in the red, with technology (-4.3%) suffering the biggest losses. As for the major indexes, the Nasdaq Composite plummeted 3.9% to 12,141, the S&P 500 Index slumped 3.4% to 4,057, and the Dow Jones Industrial Average surrendered 3.0% to end at 32,283.
"Market movements are still dominated by interest rate moves and expectations," says Tim Courtney, chief investment officer at investment advisory firm Exencial Wealth Advisors. "Obviously, this speech usually commands attention but even more so this year because of the moves higher in rates. While there are questions like: Are we in recession? Where are the earnings? Are we fixing supply chains? What is consumer spending looking like?, the dominating concern is what interest rates are doing next."
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Days like today can test an investors' resolve, but it's important to practice patience. "Because we don't know how high the Federal Reserve plans to hike interest rates, investors should be prepared for more volatility through year-end and into 2023," says Robert Schein, chief investment officer of financial services company Blanke Schein Wealth Management. "Investors should continue to assess their personal risk tolerance, adjust their portfolio allocation as needed, and reconsider their investment objectives in light of elevated volatility."
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