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The Fed Is Cooling the Economy Down, but Stocks Are Hot. What Gives?

  • August 09, 2022

With such optimism driving stock prices, any shock that shows inflation accelerating could quickly drag financial markets lower. As a result, Alan McKnight, the chief investment officer at Regions Bank, said he was “less sanguine” than the financial markets appear.

Other factors may explain seemingly puzzling market moves.

August is typically a quiet month for stocks, with transaction volumes declining as traders step away from their desks for summer vacations, making prices more susceptible to sharp movements. The volume of trades in a $375 billion exchange-traded fund that tracks the SP 500, which trades under the ticker SPY, fell to its lowest level since November last month.

There has also recently been a re-emergence of fevered trading in “meme” stocks like the cinema operator AMC Entertainment, up more than 60 percent this month, and the home goods store Bed Bath Beyond, up more than 120 percent this month.

The mix of these trading patterns has made interpreting the trends in financial markets — already grappling with rising inflation, rising interest rates and rising recession worries — even harder.

“It’s been an extraordinary economic environment for many reasons, right?” said Ben Snider, a market strategist at Goldman Sachs. “So it’s hard to say something is unusual or usual because everything has been unusual recently.”

The SP 500 has inched lower in recent days, but the declines have been modest in relation to gains last month, suggesting that investors may be bracing for Wednesday’s inflation numbers before making their next meaningful move. The index fell 0.4 percent on Tuesday.

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