The most recent release of inflation data prompted a change of heart for many of those who had made bearish bets on the economy and the market. We saw a decline in consumer and wholesale prices that exceeded expectations and was in line with the first slowing of retail sales in six months. These combined to spark a reaction rally in the market that continues today and caught short sellers offside and TV talking heads by surprise. As we’ve come to expect where the market is concerned, a news-fueled reaction rally can give life to an overreaction in the narrative surrounding it.

After a stellar first half and a good start in July, riding a wave of upward momentum, both the S&P 500 and NASDAQ have since erased the returns investors had amassed since June. Despite that, they can find solace in their remaining current YTD returns from those indices of roughly 11% and 23% in turn.

It’s reasonable to attribute the second quarter’s strong close to the pause in rate hikes announced by the Fed in mid-June. Q3 built on that strength as investors anticipated an extension of that pause at the July meeting. Alas, that proved to be wishful thinking as the pause became a mere skip, the Fed announcing a 25bp bump in the Fed Funds rate.

The long-awaited hiatus in rate hikes was announced by the Fed on June 14. Chairman Powell’s statement that followed lifted the curtain a bit on sentiment within the Board regarding future rate projections. There are some voting members who favor at least two more increases in the Fed Funds rate by year-end, followed by a pivot to lower rates in ’24 and ’25.

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The US economy won’t easily buckle under pressure from the Fed’s weaponizing of interest rates and lightening of its balance sheet. Historically, these are sure-fire methods of dousing the fires of inflation and, unfortunately, the economy along with it.

It would seem so. That’s the prevailing view among analysts and investors following last week’s parting shot from the FOMC in the form of a .25bp hike in the Fed Funds rate. For many, it felt like the door hitting our backside as we neared the exit of the Fed’s credit-tightened, financial ecosystem. Whether this move was necessary to win the inflation battle was hotly debated prior to Wednesday’s announcement.

March has provided investors with an especially news-rich environment that raised an already high level of uncertainty over the economy’s future. Conflicting economic data, questionable banking practices, and heightened speculation over the Fed’s next move left equity investors sitting on their hands while bond market participants got busy pricing in some significant changes to their economic outlook.

February kicked off with the Fed announcing a widely expected .25 basis point hike in the Fed Funds rate. In Chairman Powell’s statement that followed, he noted that while inflation remains historically high, price expectations have moderated.