Renewed Selling Pressure

As of writing, the S&P 500 has fallen more than 7% over the last several weeks, including a 5% skid in the few days immediately following Federal Reserve Chair Jerome Powell's address at the Fed’s Jackson Hole conference. Here are a few things to keep in mind.

Not much has changed. The hawkishness conveyed by Chair Powell?at?Jackson?Hole?–?namely his?insistence?that?the?Fed?“must?keep?at?it?(raising?rates?to?tame?inflation) until?the?job?is?done” – may have spooked equity markets, but it didn’t change expectations for rate hikes all that much and it certainly wasn’t a change in tune from the Fed. The market’s outlook for where the fed funds rate?will be at?year-end only?barely?inched higher following the speech, perhaps indicating that Powell’s degree of hawkishness?was?already?priced?into?those?markets.?Further, most?other?Fed governors?had?already spent?weeks?giving?hawkish speeches and jawboning inflation following July’s lower-than-expected?inflation?print?(and?the?market’s?rally).?Powell’s?speech only?served?to confirm the?Fed’s?ambitions,?but?equity?markets were obviously not positioned well for it.

Inflation is still too high. It boils down to this. Even if there are plenty of signs that it is peaking (freight rates and gas prices moderating,?money?growth?falling,?etc.),?the?Fed?will?need?a?longer?and?broader?body?of?evidence?to?reverse?course. The recent softening in commodity prices is a necessity, but those prices are volatile. The Fed will also want to see cooling in housing and labor markets to get comfortable slowing down. There’s still a way to go on those fronts.

Bear markets are a process. Since World War II, the average bear market has taken roughly a year to get from all-time?high?to?bottom.?Along?the?way,?bear?market?rallies?are?highly?common?–?the?2000-02?bear?market?saw?three?separate rallies of ~20%+ on the way to the ultimate low. Relatedly, the V-shaped bounces seen after the?2018?and?2020 bear markets are uncommon and unlikely without policy support (which likely isn’t coming any time soon). All this is to say, the recent reversal is par for the course when investing through a bear market.

Long-term bullish. The S&P 500 has a 100% success rate in beating bear markets and recessions. The S&P 500 has been positive?88%?of?rolling?five-year?periods.?Said?another?way,?every?purchase during?past?bear?markets?was?an?opportunity to buy at a discount. We’re in a unique environment wrought by the world’s first global pandemic, but it’s not the first Fed tightening cycle nor is it our first bout of inflation. US companies and the stock market will persevere. In the end, the day-to-day machinations of the market only matter to the extent we allow them to. Volatility and selloffs – in all of their various shapes and sizes – are just a reality for the long-term stock owner.

So, give us a call, build a financial plan, play the long-term game, and the day-to-day volatility becomes nothing but noise. Charts c/o Baird and Invesco.