Equity Overview

All sectors in the S&P 500 except energy and utilities declined in August.  Value stocks significantly outperformed growth.  Volatility was moderate until the last four days of trading, when the S&P 500 declined 5.8% on disappointing comments from the Fed on inflation and interest rates.

Second quarter earnings reported in August continued resilient.  With 98% of S&P 500 companies reporting, 75% have beaten consensus earnings expectations and 71% have beaten consensus revenue expectations.

Macro Overview

Economic data reported in August were mixed.  Payrolls and retail sales showed gains, and unemployment declined to 3.5%.  But housing remained weak as higher interest rates pressured sales.

Inflation once again dominated headlines in August.  For most of the month, markets shrugged off Fed comments about the need to fight inflation with higher interest rates.  But in a speech on August 26, Chairman Powell was unequivocal.  He committed to “use our tools forcefully” and “for some time,” indicating that it would inflict “some pain” which he described as one of the “unfortunate costs of reducing inflation.”  Markets took it hard.  The S&P 500 dropped 3.5% that day, and further by end of the month.

Notwithstanding the market action, there are some encouraging signs in the underlying economy.  All          of the 22 million jobs lost in the pandemic have been recovered. Supply chain issues are improving, as ocean container shipping costs have fallen 64% in the past year.  Gasoline prices have shown steady declines, along with the price of oil.  So, on the critical question—whether the U.S. economy is headed for recession—the jury is still out.