I was up in the Sierra Nevada mountains the other week. Usually around this time of year (barring any fires), I go on a hiking trip with some friends. We have been hiking parts of the John Muir Trails over the years. None of us have the time (or the energy) to do it all at once. This year we were going to hike Mount Langley, but the weather had other ideas. The recent storms from Hurricane Kay might have given Southern California a little rain but at 11,000 feet we received a surprising amount of rain, hail, and snow. The hike out of the camp was not too bad, but the drive out of the Sierras proved surprisingly treacherous with dense fog. With the fog and slippery roads, we drove down the mountain at a snail’s pace. Thankfully, the poor visibility hid the sheer cliffs next to the roads. Unfortunately, when I got back into town, the big drop down was still ahead.
Much of the summer rally in stocks has hopes for a potential “Powell Pivot.” If Jackson Hole did not squash those hopes, surely last week’s Consumer Price Index (CPI) report did. The higher-than-expected inflation figures showed that the prices for almost everything continue to rise. Increases in “core” items like rent, healthcare, and dining (grey bars below) outpaced the declines we are seeing in energy prices (yellow bars below). While inflation decelerated to 8.3% from the 9.1% we saw in June, it wasn’t fast enough for the Federal Reserve to slow its course. The governors will likely raise interest rates by 0.75% this week – the third hike of this size in so many meetings. In fact, the hot inflation print has markets expecting the Fed to raise another 0.75% at the following meeting in early November.
The Fed’s path over the next few months seems clear but the forward path for the economy and the stock market remains foggy. Much like the roads out of the mountains, when the conditions get rough, it is just best to slow down and take your time. Experience in getting through tough conditions can help too. You know what signs to look for and what to avoid. So far, the data continues to show that the American economy has been slowing down but at a manageable pace. The data still does not point to systemic issues we saw during the Great Financial Crisis in 2007-2009. We’ll continue to monitor the data, especially as we get third-quarter data in the coming weeks.
Benjamin Lau, CFA
Chief Investment Officer