What Y’All Can Expect From Jackson Hole
Former Federal Reserve Chair Ben Bernanke once said that monetary policy is 98% talk and 2% action. He was only half joking.
Wall Street is bracing for the annual Economic Policy Symposium in Jackson Hole, Wyoming, held August 24-26. Fed officials, plus their pals from the European Central Bank, the Bank of England, and the Bank of Japan, will gather amid spectacular scenery in the Grand Tetons to make imposing statements, schmooze among themselves, and preen for the press. (The bar tabs must be astronomical.)
Fed Chair Jerome Powell is scheduled to give a speech on Friday at Jackson Hole. Last year at the summit, Powell’s hawkish remarks sent the stock market reeling. Last week, release of the Fed’s downbeat minutes exerted similar bearish effect. Wall Street nervously awaits Powell’s pronouncements on Friday, with the hope that he doesn’t demonstrate his usual propensity for talking down the markets.
Inflation has been moving closer to the Fed’s target of 2%. Accordingly, futures markets currently anticipate no interest rate increase at the next Federal Open Market Committee (FOMC) meeting September 19-20. But don’t expect Fed officials to declare victory at Jackson Hole. Some inflation components (e.g., rent, gas prices, and car repairs) have shown “stickiness.”
A rocky road to the soft landing…
The main U.S. equity indices slumped last week, marking a three-week decline for the S&P 500 and tech-heavy NASDAQ. The indices rebounded Monday, but closed mostly lower Tuesday in choppy trading, as follows:
- DJIA: -0.51%
- S&P 500: -0.28%
- NASDAQ: +0.06%
- Russell 2000: -0.28%
Weighing on the market Tuesday was a decline in financial services stocks, after S&P Global cut credit ratings for several banks with exposure to the beleaguered commercial real estate sector.
That said, consumer resilience and better-than-feared corporate earnings are keeping a floor under stocks. With 95% of S&P 500 companies already having reported second-quarter 2023 results, earnings have surprised positively by 7.6%, although earnings are down 5% on a year-over-year basis.
The scenario of an economic “soft landing” is still on the table. The U.S. economy was projected to shrink during Q1 and Q2 of this year, but the consensus of economists now expects growth to stay in positive territory for the rest of 2023.
In his remarks Friday, Powell is likely to keep the door open to further rate hikes, largely due to economic growth that continues to surprise on the upside. When investors feel better about the economy, bond prices fall and yields rise. The 10-year Treasury yield has risen to 4.31%, its highest level since 2007.
There’s still reason to believe that, despite the August slump so far, the year-to-date rally has legs. A major reason for optimism is the action of the New York Stock Exchange Advance/Decline line (NYAD), which hovers well above it 50- and 200-day moving averages (see the following chart, with data as of market close August 21).
The NYAD shows how many stocks are advancing versus declining in any given period on the New York Stock Exchange. A rising NYAD is bullish, because it denotes improving market breadth.
Despite losing steam last week, the stock market rally doesn’t seem to be in serious jeopardy. Nor is the market’s rise dangerously dependent on a handful of mega-cap leaders.
However, Asian markets are likely to remain under pressure, as worries worsen about China’s economy and its troubled real estate sector.
There’s concern that China’s vastly overextended real estate market might collapse, triggering financial contagion. Property developer China Evergrande Group (OTC: EGRNF) filed for bankruptcy last week and the Chinese government’s response has been widely dismissed as inadequate. Beijing’s policymakers this week implemented smaller-than-expected cuts to loan prime rates, disappointing global investors.
Real estate comprises about 30% of China’s gross domestic product, making it the single biggest contributor to the world’s second-largest economy. If more bad news emanates in the coming days from China, the Jackson Hole summit could turn out to be a dour affair. Saddle up.
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John Persinos is the editorial director of Investing Daily.