August 2022 Market Insights
BY: LINDA S. PARENTI, CFA - Managing Principal
Month-to-date, the equity market has continued the positive momentum seen since the latter half of June. While still down 9% year-to-date, over the past few months the S&P 500 has been overall in rally mode. As of the close yesterday, the index has risen nearly 17% off its June 16 low. Some of the early rebound was likely due to oversold conditions. Yet, with signs of slowing in some parts of the economy, a Federal Reserve bent on continuing to step up interest rates, and inflation near multi-decade highs, you might reasonably wonder why all the enthusiasm.
As we all know, the Fed has been rapidly increasing interest rates since March to push down demand with the hope that this will lead to lower inflation. So far, they have raised rates four times for a total increase of 2.25% and are expected to continue through yearend. As evidenced by the housing market where higher mortgage rates have lowered home affordability, their tighter monetary policy has clearly had an impact. Even so, there are plenty of economic readings that have been steadfastly strong, and any evidence of economic endurance has been encouraging to the markets. First and foremost is the low unemployment rate. Consumer spending as measured by retail sales is another. And although actual and estimated future earnings growth from corporations is slowing, it is positive. However, since there is a lag effect between the time the Fed hikes rates to when the affect shows up, the fear is that the Fed could go too far and push the economy into a recession before lower inflation readings even start to show up. Therefore, markets breathed a collective sigh of relief when a possible peak in inflation finally showed up in July’s Consumer Price Index and Producer Price Index reports. In addition, there is building evidence that the supply issues which are pushing up inflation may also be improving. The Fed has no influence over supply, only demand. So improvements on the supply side would be a welcome contributor to the battle against inflation.
It will take more than a few, better-than-expected readings from a single month to change the Fed’s current path. The Fed has articulated it will remain vigilant against inflation until it sees clear evidence it is trending lower. We should expect no less. A credible Federal Reserve is vital to keeping long term inflation expectations grounded. But there is still reason to believe our economy may be healthy enough to withstand some additional rounds of medicine.
In news from Washington, over the past two weeks there have been several pieces of new legislation signed into law. First was the bipartisan $280 billion CHIPS and Science Act designed to boost our domestic semiconductor supply chain and promote the development of advanced technologies. As ongoing chip shortages are still hampering many industries, it is hoped the investments planned will help in later years to improve the supply chain issues we face today. This was followed by the Inflation Reduction Act, a reduced version of the administration’s proposed Build Back Better Act. The Act outlines $437 billion in investments, most of which is earmarked for climate protection and investments in clean energy. It pays for the spending with a new 15% minimum tax on corporations, prescription drug pricing reform, and a 1% tax on corporate buybacks. While there is debate on how the components of this Act will reduce inflation, Wall Street analysts estimate the increased tax burden on corporate America is unlikely to significantly reduce profits in aggregate. The Act also includes a small number of business credits and consumer incentives for clean energy choices. If you would like to know how these credits and incentives might be helpful to you as a business owner or consumer, please reach out to us at: https://mybuckingham.com/contact.
Linda S. Parenti, CFA
Managing Principal
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.