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The stock market looked rosy at the start of this week, working off of the rally that ended the week last week. Upside momentum quickly left the scene after the August CPI report gave the market 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 rough. This week was the fourth losing week out of the last five weeks for stocks and Tuesday’s sell-off was the fifth-largest 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.
I believe this move was primarily caused by hotter-than-expected inflation data likely means the Fed is going to stay on an aggressive rate-hike path. The Fed’s goal, which they’ve been saying for a while, is to get inflation under control, and it has no interest in being the stock market’s friend.
As expected, the fed funds futures market moved after the CPI release. 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%.
Other economic data this week included a better-than-feared August PPI report that did nothing to calm the sell-off. The August Retail Sales report was also less than exciting. Additionally, several companies ($FDX, $NUE, $EMN, and $ARNC) issued earnings warnings this week. The S&P 500 materials sector was the biggest laggard on the week, closing down 6.7%, notably due to the big material company’s warning.
The real estate and communication services sectors suffered the steepest losses after materials, closing down 6.5% and 6.4%, respectively. Energy and health care were the “best” performing sectors this week, closing down 2.6% and 2.4%, respectively.
Next week is an important week event wise with the Fed’s monetary policy statement and interest rate decision happening on Wednesday. There are also a number of other large country’s announcing their interest rate decisions including Japan, Great Britain, Switzerland, and China.
With inflation staying stubborn and the negative effects of the last four interest rate hikes finally starting to materialize, it’s becoming more likely that the Fed stays aggressive with their rate path throughout the end of the year. It’s also becoming more likely that this “soft landing” that the Fed keeps talking about does not happen. I think the Fed’s decision next week and the market’s reaction could be a big indicator of what’s to come for investors over the coming months. I think next week will have some downside, however much of next week’s rate hike seems to be priced into the market, so I’m hopeful that next week won’t be as red as this week. Throughout all the red this week, I took advantage of the discounts with some buys in Cummins ($CMI), Intel ($INTC), and a few others you can read about in the portfolio update here. Use that update to help you put together a shopping list of some solid dividend stocks to pick up for the long term.