Wall Street has been fixated on what Federal Reserve Chairman Jerome Powell might say Friday at the annual Jackson Hole, Wyo., economic symposium for clues about the central bank’s next steps on interest rates.
While the speech will matter, stock-market investors should also pay heed to weaker U.S. economic data, including falling home prices and slumping sales that point to a sputtering housing market, said Kevin Gordon, senior investment research manager at Charles Schwab & Co., in an interview Wednesday.
“It’s important what he says, but we also have to keep in mind it’s not a policy meeting,” Gordon said of Powell’s Friday speech, adding that Fed officials have been clear they will lean heavily on economic data when making policy decisions.
In terms of the cooling housing market, “The upside is that it’s not a repeat of the build up of the subprime lending bubble,” he said, referring to a teetering housing market in 2007 that sparked a wave of mortgage lender bankruptcies and the set the global financial crisis in motion.
“The downside is the negative ripple effects, and how much of a role housing plays in the wealth effect,” Gordon said.
In terms of potential stock-market impact, he ranked inflation as a top factor to watch, followed by the labor market and housing, which has ties both to high costs of living and the jobs market.
“It’s a massive portion of the economy,” he said of housing.
Studies have shown that American households have been prone to spend more as the value of their homes increase, even though a JPMorgan Chase & Co. report from 2020 showed more frugal ways set in after the global financial crisis, based on a review of the bank’s clients in the post-Great Recession period.
Importantly, the study preceded trillions worth of pandemic aid that has been sloshing through the economy, financial markets and housing since 2020. A reversal of the Fed’s easy-money stance contributed to a historic selloff in stocks and bonds in the year’s first half.
The big debate now is whether a U.S. recession already has been priced into markets. The sharp summer rally in stocks in July and early August has been largely on pause in recent sessions, even after the S&P 500 index
and Dow Jones Industrial Average
on Monday booked their sharpest daily declines in about two months. The big three indexes closer modestly higher Wednesday.
The trajectory for stocks in coming months could hinge on how restrictive borrowing rates become in terms of the U.S. economic outlook and for households, an engine of economic activity.
“The Fed is likely to continue to hike rates a bit higher than current market expectations,” said Brendan Murphy, head of global fixed income, North America at Insight Investment, in emailed comments.
The market has been pricing in roughly a 3.75% peak policy rate by mid-2023, from a 2.25-2.50% range currently, he said, with a “fairly quick reversal of some of those hikes” later in the year.
“Our expectation is that the terminal policy rate may be higher than what is implied by the market and likely to be followed by a pause in the hiking cycle rather than a quick reversal.”
In a reprieve for lower income households with student loans, President Biden on Wednesday announced plans to cancel $10,000 in student debt and $20,000 for Pell grant recipients.
Biden said that getting an education “used to be a ticket to a better life” on Wednesday, but that it became too expensive for many families.