This year has been an emotional roller coaster for investors. After a steady march downward the first half of the year, we saw a sharp decline in mid-June followed by a rebound this summer as it became clear that corporate earnings did not collapse, and recession did not set in. The market has remained volatile, however, and dipped once again following hawkish statements last week from Federal Reserve Chairman Jerome Powell.
Speaking on Friday at the Fed's annual symposium in Jackson Hole, Wyoming, Powell announced that we will have tight monetary policy for some time before inflation is under control. He said continued rate increases will result in slower growth, a weaker job market and "some pain" for households and businesses.
Last week, the market also received the news that the Fed's preferred inflation indicator, the core Personal Consumption Expenditures price index, is still far above the Fed's 2% target, coming in at 4.6% for July, year over year, down from 4.8% in June.
Despite persistent inflation, the economy is holding its own. S&P 500 earnings for Q2 were better than expected, up 10.3% from a year earlier, well above the 5.6% the market had forecast. We've also seen relatively positive news on retail sales, employment, industrial production and new orders.
Though we're not currently in a recession, remember that when the Fed raises rates, it can take six to nine months for those increases to affect demand and the overall economy. As a result, in my barbell portfolio, I am overweight value, emphasizing energy, materials, financials and defensive health care. On the tech side, I'm highly selective, focusing on quality companies with strong balance sheets that fall into the value or enterprise-spend categories rather than traditional growth.
Notable Bright Spots in a Mixed Economic Picture
When it comes to retail demand and employment, it's evident that the momentum sparked by extensive fiscal and monetary stimulus in the past two years is still with us — for now. July retail sales were up 10.3% year on year, and excluding autos and auto parts, rose 12.3% year on year.
Jobs are still plentiful, with 10.7 million open jobs in the U.S., according to the latest JOLTS survey. There are still more job openings than unemployed people: In July, the number of jobless people edged down to 5.7 million, and the unemployment rate edged lower to 3.5%.
Manufacturing output, meanwhile, rebounded 0.7% in July after declining 0.4% for each of the two previous months. July's increase was far above market forecasts for a 0.2% rise. In the past several months, we have seen a notable shift in consumer demand from goods to services. In the Institute for Supply Management's Services ISM Report on Business, the new orders index — a leading indicator — came in at 59.9% in July, versus 55.6% in June, comfortably above the expansion threshold of 50. I see this as a strong sign for the months to come.
