George Square Financial Management Market Commentary in conjunction with Albemarle Street Partners

Markets Process Hawkish Messaging as Fed Stays Resolute 

Stocks shook off their mid-month lows to close out August higher after Fed Chair Powell reiterated the central bank's determined focus on restoring price stability.  

Speaking at the Jackson Hole annual symposium, Powell indicated the Fed will continue raising rates to combat inflation, though he balanced this with encouragement around the economy's fundamental resilience. The core Personal Consumption Deflator, the Fed's preferred inflation gauge, ticked down slightly in July, and wage growth appears to be moderating even amidst a tight labour market. This gives the Fed room to pause rate hikes to monitor the lagged effects of prior tightening. Recent economic data firmed expectations for the Fed to remain on hold at the September Federal Open Market Committee meeting. Elsewhere, both UK and European consumers are feeling the pinch of high inflation. 

U.S. stocks finished August on a flat note, with the index of large-cap US stocks barely budging amid mixed signals on the economy and Fed policy. However, European, UK and Chinese equities closed the month weaker, shedding between 3-7%. Slowing manufacturing activity and broader economic concerns weighed on investor sentiment towards these regions. 

Recent Purchasing Managers’ Index readings, which measure the health of manufacturing output, indicated a contraction in both the Eurozone and UK factory sectors. China continues working to shore up its property sector amid defaults, while also dealing with power shortages and heatwaves which constrained industrial production in August. China’s latest supportive policy actions could aid its goal of steadier economic growth near 5.5% this year. 

Our portfolios have continued to participate in narrow market rallies as our diverse large-cap equity exposures have benefitted from improved investor sentiment. Portfolios have maintained duration exposure in government and investment grade corporate debt, which provides protection against a sudden recession. While risks remain tilted to the downside, the U.S. is underpinned by strong household and corporate fundamentals. The sharp summer bear market rally also suggests investors have priced in much of the anticipated economic slowdown. 

Overall, markets appear to be looking through near-term uncertainty with an eye towards 2024. With inflation continuing to decline, markets hold out hope for eventual Fed policy pivots next year. For now, investors look to upcoming economic data for clues on the Fed's next steps.