Stocks plunged on Friday as a favorable reading on inflation did little to offset Fed Chairman Jerome Powell’s hawkish tone in a much-anticipated speech.
Before the opening bell, Commerce Department data showed the Personal Consumption Expenditure (PCE) Index — the Fed’s preferred measure of inflation that tracks consumer spending — rose 6, 3% year-on-year in July, slower than the 6.8% rise seen in June. On a month-to-month basis, the index fell 0.1%. Core PCE, which excludes volatile energy and food prices, rose 4.6% year over year and 0.1% month over month – two figures lower than what was reported last month and what economists expected.
But one or two data points don’t make a trend, as Powell indicated in his mid-morning speech at the central bank’s annual symposium in Jackson Hole, Wyoming. “While the weaker inflation readings for July are welcome, the single-month improvement is well below what the Committee will need to see before we are confident inflation is coming down,” Powell said. , while signaling that more rate hikes are needed to bring inflation down. And while those efforts will likely cause “some pain for households and businesses” as hiring and spending slow, “a failure to restore price stability would mean far greater pain,” he added. .
“The talk frankly didn’t dig any new ground, acting more like a cudgel against those looking for a quick pivot, a wink or rate cuts in 2023,” said Douglas Porter, chief economist at BMO. Capital Markets. “Arguably the most telling line of Powell’s remarks was, ‘The historical record strongly cautions against premature policy easing. In a nutshell, Powell hammered home the theme that there is still work to be done and the work will take time.”
“Continued inflationary risks overshadow recent indicators of an impending economic slowdown,” said Johan Grahn, head of ETF strategy at investment management firm AllianzIM. The Fed Chairman had to stay firm in his hawkish stance during today’s speech, given his “previous comments about the Fed’s unconditional commitment to preventing a transition to an inflationary regime,” adds Grahn.
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Investors hit the exits en masse after Powell’s speech. The 11 sectors ended the day in the red, with Technology (-4.3%) suffering the most significant losses. With regard to the main indices, the Nasdaq Compound fell 3.9% to 12,141, the S&P 500 Index fell 3.4% to 4,057, and the Dow Jones Industrial Average fell 3.0% to close at 32,283.
“Market movements are always dominated by interest rate movements and expectations,” says Tim Courtney, chief investment officer at investment advisory firm Exencial Wealth Advisors. “Obviously this talk usually gets attention, but even more so this year due to rising rates. Although there are questions like: are we in a recession? Where are the profits? supply chains? What does consumer spending look like??, the overriding concern is what interest rates will do next.”
Other news on the stock market today:
- Small cap Russell 2000 returned 3.3% to 1,899.
- U.S. Crude Futures rose 0.6% to $93.06 a barrel.
- Gold Futures Contracts fell 1.2% to end at $1,749.80 an ounce.
- Bitcoin down 4.5% to $20,648.69. (Bitcoin trades 24 hours a day; prices shown here are as of 4 p.m.)
- Dell Technologies (DELL) fell 13.5% after the personal computer maker reported earnings. In the second quarter, Dell reported better-than-expected earnings of $1.68 per share, although revenue of $26.4 billion was just below analysts’ consensus estimate. “Despite the well-known PC weakness, selling prices improved thanks to a better trade mix while supply chain execution contributed to the reduction of the (now normalized) backlog,” says Angelo Zino ( Buy), analyst at CFRA Research. “ISG’s backlog, mainly servers, remains high due to a shortage of components (e.g. power supplies). We expect lower component costs and lower logistics expenses, which which could support margins but also put downward pressure on pricing. We continue to find DELL’s valuation attractive and appreciate its improved financial position.” Looking ahead, fellow PC maker resume (HPQ, -8.9%) is one of the headliners on next week’s earnings schedule.
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Days like today can test an investor’s resolve, but it’s important to be patient. “Because we don’t know how high the Federal Reserve expects to raise interest rates, investors should be prepared for greater volatility through the end of the year and into 2023,” says Robert Schein, chief investment officer of financial services firm 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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