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As third-quarter earnings season gets underway, markets were mostly lower last week as investors digested the latest inflation data and its implications for Fed policy. Defensive sectors like healthcare and consumer staples outperformed, while consumer discretionary and communication services lagged, dragged down by names like Amazon, Meta, and Tesla.
The S&P 500 Index fell its third consecutive quarter for the first time since the global financial crisis more than a decade ago. Last year the Fed believed that inflation was “transitory”, but that has proven not to be the case.
For the first time in four weeks, stocks ended higher but gave back early week gains as Friday's jobs data was deemed "too strong" to satisfy a hawkish Fed. Energy was the standout sector performer this week, as OPEC decided to cut global production.
Turmoil in UK financial markets and lack of confidence in hawkish Fed actions sent stocks to their third consecutive weekly decline for the first time since 2009. The S&P 500 Index broke below its mid-June lows, retreating to November 2020 levels. And the 10-year Treasury breached 4% for the first time since 2008.
A hawkish Fed, led by head hawk Jerome Powell, sent stocks into a brutal sell-off, and bond yields shot up sharply higher. The Dow Jones Industrial Average and S&P 400 Midcap Index fell to new intraday lows not seen since late 2020.
Thanks to a hotter-than-expected consumer price index (CPI) inflation print of 8.3%, stocks suffered their largest weekly drop in 3 months. The report dimmed investor hopes that the economy had moved beyond "peak inflation". Even more concerning was that core inflation (ex-food and energy) jumped to 6.3%, its highest level since March.
Wall Street broke its losing streak last week as investors bet the market sell-off had bottomed after surrendering half its summer rally. Inflation fears are also moderating as oil prices declined—hitting their lowest level since Russia’s invasion of Ukraine—helping reset inflation expectations.
Stocks finished lower heading into the Labor Day weekend, as investors were still trying to digest the implications of the Fed's hawkish tone coming out of Jackson Hole. The S&P 500 extended the losing streak that started with Jerome Powell's speech on August 26th.
A commodity price supercycle is an extended period of time during which commodity prices are above historical norms. There have been two occasions in the past 50 years coined "commodity supercycles" - the end of the Bretton Woods system in the early 1970s, which ended in the collapse of oil prices in 1986; and the period from 2001 to 2014 fueled by rapid growth in demand from China, the U.S. shale boom, and post-global financial crisis stimulus.
Stocks sold off last week on rate worries thanks to the hawkish tone coming out of the Kansas City Fed's annual conference in Jackson Hole, Wyoming.
