It seems as if a change of seasons may usher in a change of reasons for stock market investors to focus on different data points than they were earlier in the year.
Over the last several weeks, Jerome Powell along with other Federal Reserve (the Fed) officials have made it know they are changing their focus within their dual economic mandates of price stability (aka inflation) and maximum employment (aka unemployment) within the United States economy as it relates to monetary policy.
As their fight against inflation has seemingly been won (as measured by government CPI, PPI and PCE deflator numbers) as a result of the Fed’s increased interest rates policy action over the last couple of years, the Fed has begun to shift gears toward ensuring employment stays stable. This last statement should become more evident during next week’s Fed meeting, where there is an expectation that interest rates will be cut for the first time since they began rising more than two years back. This “change in focus” is an important one for market watchers as it means, going forward, labor market statistics will now take “center stage” and will likely affect short term market moves more so than the inflation numbers had in the past.
Another, key shift in data analysis has to do with the interpretation of economic statistics by investors. During its war on inflation, so called bad news (for the economy) was seen as good news for financial markets as it implied a slowing economy was the pre cursor of lower inflation numbers and ultimately lower future interest rates. Now however, we are back to the bad news is bad news for both the economy and by association, the financial markets. The rationale here is that an ever-increasing number of economic statistics pointing to a slower U.S. economy, may be interpreted as a sign of the greater likelihood that an economic recession may occur at some point in the not-too-distant future. Hence, the debate by market watchers whether the future US economy will experience a hard landing, no landing or soft-landing scenario.
Both these points above, suggest market pros are changing their view on what data to analyze as a way of front running “risk avoidance” as it relates to financial markets. This in turn means that market volatility may increase over the fall season, until investors make the adjustment needed to become comfortable with the future investment climate that we may find ourselves in.
Economic cycles move up and down and over time, but investors invariably always adjust to new economic realities. The issue discussed here however, relates to the change-over time period needed by markets to adjust to the new economic realities. As circumstances would have it, it’s looking like that change-over time period, investors are undergoing, is coinciding with some other short-term uncertainties over the coming weeks. These other uncertainties include international geopolitical events, not to mention the upcoming U.S. election and its outcome as it relates to future economic policy of any new administration.
In the end, fundamentals will re-emerge as the most important factors that drive markets, but in the meantime, investors may have to put up with above average volatility this upcoming fall, until we enter the winter months and have yet another change of seasons!
Mike Candeloro, Senior Portfolio Manager and Wealth Advisor with RBC Dominion Securities and the head of The Mike Candeloro Wealth Management Group supplied this article. RBC Dominion Securities Inc. and Royal Bank of Canada are separate corporate entities, which are affiliated. Member CIPF. Mike can be reached at Michael.candeloro@rbc.com You can also visit his website at www.michaelcandeloro.com or on LinkedIn. To read Mike’s archived articles please visit Mike Candeloro / Special to The Nugget | National Post