Hey folks,
I made some posts on my Substack that I didn’t send out as separate e-mails (I’m trying to keep these newsletters to once a week). But if you’re interested, here are the links to the posts:
Cloudflare: A Multi-Act Cybersecurity & Edge Computing Company
Procore: A Software Company Integrating Financial Products
Why Inflation Expectations Are So Important
The stock market plunged on Friday after Fed Chair Jerome Powell gave a speech at the Jackson Hole Economic Symposium. Someone asked me, “Why did the market tank? Powell didn’t say anything new.”
Here’s what I think.
If you want to attribute Friday’s decline to something, it’s easy to do that. You could point to the fact that Powell said the Fed will do whatever is necessary to bring down inflation, even if it means hurting the economy.
“Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation.” -Powell
You could also point to comments from Powell that suggested the Fed will push interest rates to a high level and keep them there, which goes against the expectations of some people who thought the central bank might cut rates in the second half of 2023.
“Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.” -Powell
So, you could use these comments to paint Powell as a little bit more hawkish than what some investors were expecting.
But honestly, a lot of times with market moves, the price action drives the narrative, not the other way around. If the market went up, we could come up with a completely different story in which we talk about how Powell said that the pace of interest rate hikes was likely to slow down soon and how that’s bullish for the market.
“At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases.” -Powell (from the same speech)
To me, the short-term market moves are noise. We know inflation is high and we know the Fed is going to stay aggressive on inflation until price pressures cool off. We’ve known that for a long time.
But we also know there are signs that inflation has peaked.
Yes, it’s going to take time before things are really back to normal. Until then, we’re in a volatile market environment where recession risks are elevated.
On the plus side, the S&P 500 is a good 10% up from its June lows. Maybe we retest the lows, maybe we make new lows, or maybe we shoot back up. Who knows?
In any case, I wouldn’t read too much into short-term market movements. A lot of it is driven by algorithms and by traders; no one can predict those things. Focus on the long term and you’ll be alright.
Agree - market commentary always has mostly been "look back and rationalize" - if the price movement had been up, then some other part of Powell's speech would have been used as justification. as you aptly point out.