Investors were nervous about risk last month, with August seeing modest market pullbacks across the board. Let’s take a look back at that performance, what was happening in the underlying economy, and whether we can expect inflation to ease in the months ahead.
Risk-Off Mode for Markets
In August, the U.S. indices were down by low single digits, with the Nasdaq experiencing the biggest decline. International markets also pulled back, with developed markets down slightly more than the U.S. markets and emerging markets doing worst of all. Even fixed income declined, as higher interest rates drove the U.S. Aggregate Bond Index down slightly.
Overall, financial markets spent the month in a risk-off mode. This position hurt riskier investments like tech stocks and emerging markets at the expense of less dynamic ones.
A Mixed Bag of Economic News
This recent market performance reflected what was happening in the underlying economy. While second-quarter economic growth came in stronger than expected, the data showed that growth is likely to slow going forward. Further, business and consumer confidence both pulled back. Finally, inflation showed signs of ticking up again, even as job growth continued to slow.
But not all the news was bad. Income and spending growth beat expectations. Still, the data was weak enough to increase investor concerns.
Inflation Trending Down?
Despite those concerns and the weak market performance during the month, markets did rally a bit toward month-end on hopes that the Fed might pause its rate increases. Rates ran up prior to the central bank’s Jackson Hole conference, especially after Chair Powell’s speech, but have since pulled back.
While inflation is up slightly, a deeper analysis of the data shows the trend should still be down. And while growth has slowed, the economy is growing—and that slower growth should be good for inflation. Progress may be moderating, but we are still moving forward.
Big Picture: Positive Outlook, Despite the Risks
Although weaker in some respects, last month’s news was still good. The economy continued to grow, as more people got jobs, worked, and spent. While inflation is still too high, it is moving in the right direction. And while the Fed is alert to inflation, it is very likely nearing the end of its rate increases. The outlook is positive going forward.
Of course, risks do remain. The biggest domestic risk is that inflation spikes again, which could drive interest rates higher and force the Fed to keep hiking. Beyond the U.S., there is the war in Europe, as well as the China wild card. Nothing is guaranteed, as there are always the risks we don’t yet see.
Still, the fundamentals are healthy. The economy may be slowing, but it is growing. The biggest problem out there, inflation, continues to trend down. We are in a good place as we head into fall.