Cooling Inflation Heats Up The Markets

The major market indices finished the week solidly higher on signs inflationary pressure may have peaked during July, spurring hopes the Federal Reserve will take a less aggressive approach in its rate hiking campaign.

August 15, 2022    |    By Michael Schwager

Performance for Week Ending 8.12.2022:

The Dow Jones Industrial Average (Dow) finished up 2.92%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 3.44%, the Standard & Poor’s 500 Index (S&P 500) gained 3.26% and the Nasdaq Composite Index (NASDAQ) tacked on 3.08%. Sector breadth was positive with all 11 of the S&P sector groups closing higher. The Energy sector (+7.14%) was the best performer followed by Financials (+5.45%) and Materials (+5.24%).

Index* Closing Price 8/12/2022 Percentage Change for Week Ending 8/12/2022 Year-to-Date Percentage Change Through 8/12/2022
Dow 33751.05 +2.92% -7.09%
Wilshire 5000 42867.31 +3.44% -11.54%
S&P 500 4280.15 +3.26% -10.20%
NASDAQ 13047.19 +3.08% -16.60%

*See below for Index Definitions

MARKET OBSERVATIONS: 8/8/22 – 8/12/22

The major market indices finished the week solidly higher on signs inflationary pressure may have peaked during July, spurring hopes the Federal Reserve will take a less aggressive approach in its rate hiking campaign. The gains left the Nasdaq Composite up over 20% from the bottom reached on June 16, putting the tech-heavy index back into a bull market. On Wednesday, the Labor Department reported that the Consumer Price Index (CPI) was flat (0.0%) during the month of July leaving the year-over-year pace at a better than forecast +8.5%, down from +9.1% in June.  The core rate (which excludes food and energy) rose +0.3% during the month and was up +5.9% from a year ago. Both of the core figures were also below economists’ forecasts. The report was followed by data showing that inflation at the producer level also declined. The Producer Price Index (PPI) fell by -0.5% in July, which was well beneath expectations for a +0.2% rise, and marks the biggest monthly decline since April 2020 when the economy was experiencing Covid lockdowns. The cooling in both the CPI and PPI reports was largely due to a sharp pullback in energy prices during the month. Underscoring the trend, the Triple-A automotive club reported that gasoline prices fell under $4 per gallon, down from the record of $5.02 reached in mid-June. Lower prices at the pump, combined with the potential peaking in annual inflation measures led to an uptick in consumer sentiment.  The University of Michigan's consumer sentiment index rose 3.6 points to 55.1 from an upwardly revised July reading after sinking to a record low of 50 in June.

While the inflation data buoyed investors' hopes that inflation may be peaking and potentially lead to slowing of the Fed's pace of interest-rate increases, Fed officials said not so fast. Minneapolis Federal Reserve Bank President Neel Kashkari told the Aspen Ideas Conference in Colorado that the central bank is "far, far away from declaring victory", and still sees the need of a Fed Funds rate approaching 4% by the end of the year. Meanwhile, Chicago Fed President Charles Evans said the Federal Reserve will probably continue raising interest rates into next year to bring down “unacceptably high” inflation.  “We’ve tightened monetary policy quite a lot, very quickly,” Evans said at an event, adding  “I expect that we will be increasing rates the rest of this year and into next year to make sure inflation gets back to our 2% objective.”  

Q2 Earnings Season:With over ninety percent of the members of the S&P 500 already reporting, second quarter results are likely to finish the quarter at a much better than feared pace. Through Friday, 455 members of the S&P 500 have reported with over 74% surprising to the upside.  Aggregate earnings for the group are up 8.7%, more than double the 4% consensus estimate at the start of reporting season. The strongest quarterly results are coming from the Energy, Industrials, and Materials. 

Market View:Our cautiously optimistic view on the markets remains intact. While not ruling out a retest of the recent lows, we have been encouraged by the strong rebound off the mid-June trough. While equity valuations have perked up a bit in recent weeks, they remain well below levels at the start of the year and suggest a lot of negative news and uncertainty has already been discounted in the markets. With inflation still running well above the Fed’s target level, rate hikes are likely to continue although the recent string of aggressive hikes could begin to moderate at future meetings.

The Week Ahead:In another data-packed week, Retail Sales and Industrial Production, along with the FOMC meeting minutes, will take center stage. Earnings reports from bellwether retailers Walmart and Target, will also be closely watched. After several profit warnings from the retail sector last month, investors will be laser-focused on management comments and the outlook regarding both the strength of the consumer and the buildup in inventories and how it will affect margins and potential inflation in the coming quarters. Other data points of interest include regional manufacturing reports from the New York and Philadelphia Federal Reserve banks, July Housing Starts and Building Permits, Existing Home Sales during July and the Index of Leading Economic Indicators. The earnings calendar will continue to wind down with just 18 members of the S&P 500 scheduled to report results. The Fed speaking calendar will be relatively light with just three events scheduled. On Wednesday, the Fed is set to release the July FOMC meeting with investors expected to parse the data for clues on the magnitude of the September hike.


The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

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