Markets Crushed on Fed Comments; Bonds Also Down

The US stock markets got crushed on Friday, sending the Dow (-4.2%), NASDAQ (-4.4%), and S&P 500 (-4.0%) down for the week.  Taxable and tax-free municipal bonds were also down about 1% for the week, as both stocks and bonds suffered from the same news on Friday.

Last week, the markets took the one-two punch on Monday and Friday.  The week started with the release of the Purchasing Managers Index (PMI), a key measure of economic activity.  The US and global PMI continued to decline and are now considered in contraction.  As the week progressed, markets began to recover those losses until Friday, when Fed Chairman Powell spoke at the annual Jackson Hole conference.  Investors were hoping that Powell would indicate the Fed as being accommodative with interest rates, but investors were proven wrong.  Powell’s comments implied that the Fed would need to continue to raise interest rates to combat inflation, and that this would cause below-trend growth in the US, along with some pain to households and businesses.  In other words, the Fed will continue to aggressively raise interest rates until they see a persistent decrease in inflationary pressure.  The markets did NOT like that, dropping precipitously on Friday, and looking to begin this week on the same trend.  In our opinion, we have a couple more months until we see some relief in this pressure, as we would need a couple months of data, rather than a knee jerk response to one month of data.  The Fed implied the same.

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