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The U.S. stock market experienced a volatile but overall positive week as investors digested economic data. The Consumer Price Index (CPI) report for August showed inflation moving higher, slightly more than expected. Headline inflation rose 0.6% month-over-month. Core inflation, excluding food and energy, increased 0.3%. Regardless of the amount, inflation is headed in the wrong direction.
Major Index Performances (as of Friday Mid-day):
- S&P 500: The benchmark index rose about 3.9% for the week, driven by strong performances in the technology and consumer discretionary sectors.
- Dow Jones Industrial Average: The Dow gained 2.6%, recovering from earlier losses thanks to gains in healthcare and industrial stocks.
- Nasdaq Composite: The tech-heavy index surged 5.9%, as leading tech firms rallied, particularly those in artificial intelligence and cloud computing.
It has been quite a rally for the market after last week’s sell off, however, the major indexes are still negative for the month, and I believe we will continue to experience bouts of volatility. Our focus in the coming week will be the latest report on retail spending. From our vantage point, we are bracing for additional slowing.
Next week is the Federal Open Market Committee (FOMC) meeting. It is unclear if they will lower rates by .25 or .50%. A .50% drop would indicate the FOMC is more concerned about the economy than earlier believed. According to former Commerce Secretary Wilbur Ross, the US is moving toward a recession now that trillions of dollars of stimulus has moved through the system. It leaves the U.S with significantly more debt and very little to show for it.
“I think the US is headed toward a recessionary period, and that shouldn’t be too surprising. It was artificially propped up by all the great situations that have prevailed, and all that cash that was pumped into the economy in the aftermath of COVID. I think they overdid that,” Ross said.
The US government dispersed around $5 trillion in stimulus during the pandemic, which revved up the economy when stay-at-home orders closed businesses and sent the unemployment rate soaring. Most of the stimulus cash wasn’t deployed productively, Ross said, pointing to Americans who “immediately spent” their checks in an unproductive shopping spree. This burst of spending fuelled the demand for goods and services, without increasing supply, which was the leading cause of inflation.
Strength in the labor market was also partly distorted by stimulus cash, he suggested. Ross estimates around 30%-40% of the jobs created after the pandemic were government-related jobs.
At this stage, we are maintaining a slightly more conservative position, maintaining above average holdings of cash and a conservative covered call strategy that focuses on excess income and some downside protection. There’s an adage that goes, “it’s not about timing the market, it’s about time in the market.” That is and adage that I happen to agree with, it is important to remain invested. But it is as important to take precautions when leading indicators provide reason for caution.
Have a wonderful weekend,
Your Portfolio Management Team
