A Friday rally moderated the losses, but the large-cap benchmarks and Nasdaq Composite index recorded their biggest weekly drops since February and rounded out the worst monthly declines since the onset of the pandemic, last week. Of primary concern: the seeming inevitability of rising inflation and interest rates. The S&P Mid-Cap 400 and small-cap Russell 2000 indexes ended with only modest losses. Declines within the S&P 500, however, were broad-based, with only energy shares notching a gain. Growth stocks fared worse than value shares, across the board.
Rising U.S. Treasury yields seemed to overhang sentiment throughout the week, with many investors appearing to view the Federal Reserve’s policy statement the previous week in an increasingly hawkish light. Following the meeting, policymakers announced a slight increase in their short-term interest rate expectations, as well as plans to consider tapering their monthly asset purchases. Fed officials were scheduled to speak on a total of 19 different occasions during the week, helping to keep the spotlight on monetary policy.
The fiscal policy environment was also shaky with the possibility that the federal government would experience another partial shutdown. This situation was averted late in the week, when a short-term spending bill was passed and signed. No progress was made in raising the federal debt limit, however, and Treasury Secretary Janet Yellen warned again that the limit needed to be suspended or raised by October 18 in order for the Treasury to meet its obligations. Although most observers agree that an actual default on the country’s debt is highly unlikely—especially given that Democrats may turn to tools to do it unilaterally—substantial market volatility followed previous episodes of brinkmanship a decade ago.
Meanwhile, the outlook for the bipartisan, $1 trillion infrastructure bill also remained clouded. Democratic leaders abandoned plans for a vote on the bill on Thursday evening, following demands from progressives in the party to link its passage to a separate bill focusing on health care, education, climate measures, and other social policy priorities.
The week’s inflation data were not quite as alarming, with the Commerce Department’s core (less food and energy) personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge, rising 3.6% over the 12 months ending in August, matching consensus. That said, continuing reports of supply restraints continue to concern investors. Shares in Nike, Bed Bath & Beyond, and Kohl’s fell sharply, for example, after the companies reported stressed supply chains and higher labor costs ahead of the holiday shopping season. The recent surge in oil prices, which benefited energy stocks, also raised broader inflation worries.
Inflation concerns are now growing amongst consumers, as well. The gauges of consumer attitudes released during the week offered mixed messages, with the Conference Board’s indicator falling to a seven-month low in September, while the University of Michigan’s ticked higher. The lead Michigan researcher noted, however, that “consumers have become much more concerned about rising inflation and slower wage growth and their negative impact on their living standards.”
There was good news to end the week, as growth in durable goods orders for August exceeded expectations, and pending home sales jumped unexpectedly. Following a decline in July, personal spending bounced back more than expected (0.8% versus 0.6%) in August, as consumers ramped up purchases for services. Other good news included The Wall Street Journal reporting that some high-frequency data on spending at restaurants suggests that fears over the delta variant may be waning.
Although it’s been quite a long while since we’ve seen interest rates and inflation on the rise, we can take heart that any pain associated with their rise will be temporary and that toiling over such changes is profitless. Rates and the markets should ebb and flow, as “the sun rises and the sun sets; And hastening to (their) place (they) rise there again” (Ecclesiastes 1:5).
Sources: Yahoo Finance, Reuters.com, and JP Morgan Market Insights
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