PAS Weekly Commentary

Inflation concerns fueled retreat

The stock market started the week on an upbeat note. Market participants had a rosy outlook for the future having latched onto the peak inflation, peak hawkishness, and soft-landing narratives.

Upside momentum quickly fell to the wayside after the August CPI report gave market participants a reality check. It renewed concerns about persistently high inflation, an aggressive Fed rate-hike path, and a potential hard landing that would undercut current earnings estimates.

The reaction from both the stock market and the bond market was brutal. This marks the fourth losing week out of the last five weeks for stocks and Tuesday's sell-off was the fifth-largest point loss for the S&P 500 in history. By the end of the week, the S&P 500 fell below the psychologically important 3,900 level.

The outsized reactions were due to market participants knowing hotter-than-expected inflation data likely meant the Fed is going to stay on an aggressive rate-hike path. The Fed desperately wants to get inflation under control, and it has no interest in being the stock market's friend.

Following the CPI report, the fed funds futures market shifted noticeably. It priced out any expectation of a 50-basis point increase at the September 20-21 FOMC meeting. Instead, it now prices in a 100% probability of a rate hike of at least 75 basis points at the next meeting, according to the CME FedWatch Tool.

The 2-yr note yield, which is more sensitive to changes in the Fed funds rate, rose 28 basis points this week to 3.85%. The 10-yr note yield rose 13 basis points on the week to 3.45%.

Aside from the August CPI report, there was a slew of economic data to digest this week, including a better-than-feared August PPI report that did nothing to dissuade the sell-off. The August Retail Sales report, which didn't show a whole lot of vigor, was also in play for participants.

Adding fuel to the fire, several companies issued earnings warnings this week. FedEx being chief among them, which followed warnings earlier this week from Eastman Chemical, Nucor, and Arconic.

Following the warnings from the aforementioned materials companies, the S&P 500 materials sector was the biggest laggard on the week, closing down 6.7%.

The real estate and communication services sectors suffered the steepest losses after materials, closing down 6.5% and 6.4%, respectively.

Energy and health care were the "best" performing sectors this week, closing down 2.6% and 2.4%, respectively.

  • Dow Jones Industrial Average: -4.1% for the week / -15.2% YTD
  • S&P Midcap 400: -4.7% for the week / -16.3% YTD
  • S&P 500: -4.8% for the week / -18.7% YTD
  • Russell 2000: -4.5% for the week / -19.9% YTD
  • Nasdaq Composite: -5.5% for the week / -26.8% YTD

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Past performance is not a guarantee of future results. Indices are unmanaged and one cannot invest directly in an index. Diversification does not guarantee investment returns and does not eliminate the risk of loss.

Data and rates used were indicative of market conditions as of the date shown and compiled by Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security. S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large-cap segment of the U.S. equities market. Each company’s security affects the index in proportion to its market value. NASDAQ Composite Index is a market value-weighted index that measures all NASDAQ domestic and non-U.S. based common stocks listed on the NASDAQ stock market. Dow Jones Industrial Average is a widely used indicator of the overall condition of the stock market, a price-weighted average of 30 actively traded blue chip stocks, primarily industrials, but also includes financial, leisure and other service-oriented firms. Russell 2000 Index measures the performance of the smallest 2,000 companies in the Russell 3000 Index of the 3,000 largest U.S. companies in terms of market capitalization. MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

Park Avenue Securities LLC (PAS) is a wholly owned subsidiary of The Guardian Life Insurance Company of America (Guardian). PAS is a registered broker/dealer offering competitive investment products, as well as a registered investment advisor offering financial planning and investment advisory services. PAS is a member of FINRA and SIPC.

2022-143941 (Exp. 12/22)