Monthly wrap for August 2022: “Don’t Fight the Fed”

Date: September 1, 2022

  • The month started with Pelosi’s controversial Taiwan visit
  • The month ended with Fed chief Powell’s Jackson Hole speech
  • In between, Wall St thought the Fed would switch to a dovish stance
  • The wrong assumption meant all US indices fell at least 4% for the month
  • The STI’s highest close for the month was 3,301 on 11 Aug
  • The STI finished at 3,221.67, up 10 points or 0.3%
  • Probability of a 75-points US rate hike this month is now 72%
  • US yield curve remained inverted
  • Singapore’s market cap up 0.1% to S$883.5b

Wall st was reminded of the mantra “Don’t fight the Fed’’

“Don’t fight the Fed’’ is a well-known stock market mantra which essentially advises investors to align their investment decisions with the actions and signals sent by the US Federal Reserve rather than against them.

In its simplest form, it means that investors should buy when the Fed is lowering interest rates and sell when rates are being raised.

Markets were reminded of the wisdom of this mantra this month when interest rate concerns erupted after a key speech by Fed’s chairman Jerome Powell.

It wasn’t the case for the entire month though, with an air of optimism pervading trading during the first two weeks.

Nancy Pelosi visited Taiwan, sparking outrage from China

However, August did start off with a wobble caused by concerns raised by the Speaker of the US House of Representatives Nancy Pelosi’s visit to Taiwan, a visit that was strongly opposed by China.

There was also worry about the state of the global economy given that in the first week of the month the Bank of England raised rates by the most since 1995 while warning of a long recession ahead. Meanwhile, China surprisingly cut interest rates to revive its flagging economy, a move that was viewed dimly by markets.

Better-than-expected bank earnings supported the STI early in the month

However, countering this negativity were better-than-expected earnings reported by the three local banks which lifted the Straits Times Index (STI) above 3,300 on 11 Aug and as the month progressed, a view took hold on Wall Street that the US Federal Reserve would probably pivot to a more dovish stance with regards to future rate hikes.

This enabled Wall St stocks to stage a decent rally across-the-board, despite the fact that the bond market did not share the same view.

Fed chief Powell’s Jackson Hole speech ended dovish hopes

As it turned out, the equity market’s optimism was misplaced. At the annual Jackson Hole symposium, a little more than a week ago, US Federal Reserve chair Jerome Powell said the Fed would lift interest rates as much as needed to combat high inflation, even if it means slowing the economy.

Powell said returning the economy to price stability will take “some time” and will require bringing “some pain to households and businesses,” which he called the “unfortunate costs of reducing inflation.”

The STI lost 10 points at 3,221.67; all 3 US indices lost at least 4% each

The ensuing selloff on Wall St meant that the STI, which had earlier gained as much as 80 points, finished the month with a nett gain of just 10 points or 0.3$ at 3,221.67.

As for Wall St, stocks ended the month with a four-day selloff. For the month, the Dow fell 4.1%, the S&P 500 fell 4.2%, and Nasdaq fell 4.6%.

Probability of 75-points rate hike now up sharply

Since Mr Powell’s comments, the federal funds futures market has been pricing in an increasing chance of a 75-points rate hike at the Fed’s September meeting. As of earlier this week, this probability was 72%, up from 55% a week earlier and 30% at the start of the month.

US Treasury yields crept higher; yield curve remained inverted

The 2-year Treasury yield, which attempts to forecast the level of the federal-funds rate a couple of years from the present, ticked up to 3.466%, to close at a new high for the year.

The 10-year bond was yielding 3.14%, which means the yield curve remained inverted as it has been for several weeks now. When the 2-year trades above the 10-year it’s called an “inverted” yield curve, traditionally seen as a signal of economic stress or recession. And the steeper the yield curve, the greater the chances of an imminent recession or downturn.

Friday’s August jobs report could be key (bad news could be good news)

The US market’s real test this week comes Friday when the Bureau of Labor Statistics publishes the August employment report. Economists expect 318,000 jobs to have been added, which would be down from 528,000 in July.

A cooling jobs market might be a good sign for the stock market because it could mean the Fed can slowly take its foot off the brakes. A jobs number too hot, on the other hand, would spur bets that the Fed remain aggressive in lifting rates, hurting stocks. In other words, bad news for the economy could mean good news for stocks.

Market’s capitalisation up 0.1% to S$883b in Aug; Reits and property worst performers

The market capitalisation of the 647 stocks listed here rose 0.1% to S$883.5b at the end of Aug from a month earlier, whilst the market cap of the 30 STI counters was 0.4% higher at S$537b or 60% of the entire market.

DBS was the biggest stock with a value of S$842b, followed by Jardine Matheson at S$56.2b. UOB was the only bank to fall in value, down S$370.9m to S$46b.

Smart electric vehicle company Nio was the biggest gainer, adding S$2.9b in market cap at S$46b. The company had a market value of S$38.6b when it listed in May.

SGX market strategist Geoff Howie noted that the STI traded within a 3% range for the majority of the month – the narrowest for a full month’s trading since Sep 2021.

The property and real estate investment trusts were the weakest performing industries in Aug, down 7.4 and 4.3% respectively. Mr Howie said he expects markets to continue watching geopolitical developments, central bank policies and Covid-19, on top of growth and inflation concerns.