U.S. stocks started off on a firm note on Friday and despite suffering a setback around mid morning, recovered swiftly and stayed firm right till the end of the day’s session to finish on a strong note.
Investors reacted positively to Federal Reserve Chair Jerome Powell’s remarks at the Jackson Hole Symposium.
The major averages all closed on a firm note, with the tech-laden Nasdaq outperforming the other indexes.
The Dow settled with a gain of 247.48 points or 0.73 percent at 34,346.90. The S&P 500 climbed 29.40 points or 0.67 percent to settle at 4,405.71, while the Nasdaq closed with a gain of 126.67 points or 0.94 percent at 13,590.65.
The Dow shed 0.4 percent in the week. The S&P 500 and the Nasdaq gained 0.2 percent and 1.1 percent in the week, after posting losses in the previous three weeks.
Fed Chair Powell reiterated the central bank’s target of 2 percent inflation, and called it “challenging” to know when monetary policy is restrictive enough to “know in real time when such a stance has been achieved.”
“There are some challenges that are common to all tightening cycles,” Powell claimed. “For example, real interest rates are now positive and well above mainstream estimates of the neutral policy rate.”
“We see the current stance of policy as restrictive, putting downward pressure on economic activity, hiring, and inflation,” he continued. “But we cannot identify with certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint.”
The Fed is basically “flying blind” with the data dependent approach, evaluating the incoming data, most of which is lagging, to determine the appropriate monetary policy going forward.
They recognize that “the light at the end of the tunnel” is evident once the labor market starts significantly weakening. The job market is slightly slowing down, but they need to see job losses, and a sharp decline in the wage grow. This will be difficult to achieve given the current US labor market shortage, and likely require further interest rate hikes, as well as keeping the interest rates higher for longer.
But there are many issues that Powell didn’t even discuss, which could complicate the Fed’s actions, even in a weakening labor market. We are in a process of deglobalization, and thus, there are significant risks of 1) commodity price spikes (food and energy), 2) supply chain shocks, and 3) persistent pressure on US labor demand due to on-shoring. In addition, the US fiscal impulse continues the Fed’s efforts to slow the demand.
In fact, Powell clearly summarizes the challenges of the Fed’s data-dependent approach:
We are navigating by the stars under cloudy skies.
In other words, Powell recognizes that the data (stars) is likely uncertain, volatile, and possibly unknown – there are many potential black swans.
Consumer discretionary, technology and energy stocks were among the prominent gainers.
Boeing climbed nearly 3 percent. Intel gained about 2.1 percent and Salesforce.com advanced nearly 2 percent.
Visa, Nike, Caterpillar, Apple, IBM, Walt Disney and Microsoft gained 1 to 1.3 percent. Cisco Systems, Johnson & Johnson, McDonalds, Merck and P&G also closed notably higher.
Affirm Holdings shares soared nearly 29 percent after the company reported better-than-expected quarterly results.
Shares of Workday Inc. rallied 5.4 percent after the company reported second-quarter earnings of $78.66 million, as against a loss of $64.16 million in the second quarter of the previous financial year.
In overseas trading, Asian stocks fell on Friday, with profit booking in tech stocks and hawkish signals from some Federal Reserve officials weighing on regional markets.
The major European markets closed on a mixed note with investors digesting Powell’s comments, and the latest batch of economic data from the region.
The pan European Stoxx 600 edged down 0.04 percent. The U.K.’s FTSE and Germany’s DAX both ended up by 0.07 percent, and France’s CAC 40 gained 0.21 percent, while Switzerland’s SMI closed lower by 0.18 percent.
VTI – TOTAL STOCK MARKET INDEX – DOWNTREND INTERRUPTED BY A BOUNCE FRIDAY FOLLOWING J POWELL’S INCOHERENT PRESENTATION –
We are navigating by the stars under cloudy skies.
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