Stocks Fall as The Fed Battles Inflation: August in Review

Stocks fell in August as investors focused on the likelihood of more interest rate hikes from the U.S. Federal Reserve. There was also profit taking after July’s big rally.

Attention in September will probably continue to focus on inflation with the next central bank meeting on September 21. While the short-term trend has been bearish because of hawkish policy, some data suggests price pressures have started to ease. This creates a debate between bears expecting more pain as interest rates increase and bulls looking for improvement.

Big Movers in August

More than two-thirds of the S&P 500’s members declined in August. Below are some of the big movers and the reasons why.

Sector Watch

The table below shows sector performance last month.

Key Economic Events in August

Below are some key economic events last month.

• Job growth beats estimates: The U.S. economy added 528,000 jobs in July. It was more than twice the forecast amount and the biggest gain since February. The increase also pushed nonfarm payrolls above their pre-pandemic total for the first time. (8/5)
• Inflation cools as energy costs ease: July’s consumer price index (CPI) was unchanged from June, missing forecasts for a 0.2% increase. It was the first month since March that CPI missed estimates. (8/10) Other inflation measures including PPI (8/11) and PCE (8/26) also rose less than feared.
• Second quarter GDP revised higher: The Commerce Department revised its estimate of gross domestic product (GDP) growth in the second quarter from -0.9 percent to -0.5 percent. The higher reading, fueled by consumer spending, beat the -0.8 percent average estimate. (8/25)
• Powell sees “pain” as the Fed crushes inflation: Federal Reserve Chairman Jerome Powell repeated a pledge to lower inflation to 2 percent. The effort “is likely to require a sustained period of below-trend growth.” He also expects a weaker job market and “some pain to households and businesses.” (8/26)

What Experts Are Saying

Below are some noteworthy commentaries.

• Barry Bannister of Stifel: S&P 500 could return to 4,400 this year as cyclical growth stocks rebound. He favored software, media, technology and retail. Bannister added that inflation could slow and worries about the Federal Reserve raising interest rates are priced in. (8/5)
• Tiger 21: The investing club for ultrarich individuals is seeing a historic shift toward equities. Chairman Michael Sonnenfelft told CNBC that members now have more exposure to stocks than real estate for the first time ever. In particular, they’re focusing on green-energy plays. (8/11)
• Morningstar: The data company reported a $425.5 million inflow into renewable-energy funds in the first two weeks of August. It was more than triple the total for all of July. The shift came amid passage of the Inflation Reduction Act, which includes $369 billion of support for technologies like solar and wind power. (8/15)
• Semiconductor slowdown: Multiple watchers of the chip industry made bearish observations. Bloomberg detailed weak demand at companies like Nvidia (NVDA) and slowing investment at Samsung Electrics. Reuters cited analysts at Bernstein and Forrester seeing less growth in cloud computing. The videogame market, another big user of chips, is also set to shrink 8.7% this year, according to NPD. (Various dates in mid-August.)
• PwC survey: Some 50 percent of companies plan to reduce headcount in the next 6-12 months. Over half expect to freeze hiring and 44 percent may revoke job offers. The poll included 722 U.S. executives in early August. (8/22)

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Newsworthy Events Next Month

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