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Market Commentary

Weekly commentary providing analysis with an outlook for the equity market.

August 10, 2022

Scott Wren, Senior Global Market Strategist

Driving home the point

Key takeaways

  • The Federal Reserve (Fed) has made it clear that fighting inflation is Job One. We do not agree with some market pundits who believe the Fed will pause or reduce the magnitude of rate hikes this year.
  • We do not believe inflation will fall as quickly as it has risen. A defensive portfolio stance is still warranted.

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There have been a number of reasons why inflation has reached 40-plus year highs over the course of the last two years as the world has searched for the “new normal” and economies continue to recover from the pandemic. Here in the U.S., money-supply growth surged as the Fed injected unprecedented levels of liquidity into the economy to help counter the plunge in gross domestic product (GDP) in the second quarter of 2020. In addition, fiscal stimulus approved by Congress totaled more than $7 trillion in the 2020 through 2021 period, leading to a huge jump in demand. This economic stimulus, along with the savings socked away during the pandemic, led to an increase in demand that overwhelmed supply chains that already faced disruptions in production and transportation. Basic economics tells us that when demand far exceeds supply, prices rise. That is exactly what has happened.

The U.S. Consumer Price Index (CPI) showed a 9.1% increase in the 12 months through July. While that could well represent the peak reading in this cycle, we think the more important factor to consider is how “sticky” some components of the inflation calculation are likely to be. While we may see a noticeable deceleration in headline CPI readings over the next few months, we continue to believe inflation will move lower only gradually with price pressures for rents and other longer-term contracts for materials or services continuing to exert an upward influence on cost gauges. Rents are unlikely to fall as fast as housing prices. Also consider that China’s ongoing zero-COVID policy sets the world up for continued and unpredictable disruptions.

The Fed has made it clear that fighting inflation is Job One. We do not agree with some market pundits who believe the Fed will “pivot” in reaction to potentially lower headline inflation by pausing or reducing the magnitude of rate hikes this year. At least a portion of the stock market rally since mid-June can be attributed to this belief. We continue to see the fed funds target rate in the 3.5%-3.75% range at the end of this year, up from the current 2.25%-2.5% range. We look for a 75 basis-point increase (100 basis points equal 1%) at next month’s monetary policy meeting and then further modest rate hikes late this year. We believe the Fed is willing to dent economic growth in order to bring inflation down into the 2%-3% range and will continue to hike rates in an effort to achieve that goal.

We expect lower commodity prices, which should result in a deceleration of headline CPI in coming months. In addition, it was a year ago when inflation really began to rise. Comparisons against the year-ago period should begin to ease as near-term inflation is not rising as fast as the same period last year.

The important point we want to drive home is that a sudden turnaround in headline inflation readings may prematurely push equity markets higher as investors believe the trend has turned lower for good. We do not believe inflation will fall as quickly as it has risen. A defensive portfolio stance is still warranted.

Risk Considerations

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal, monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity.


An index is unmanaged and not available for direct investment.

Consumer Price Index (CPI) produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. An index is unmanaged and not available for direct investment.

General Disclosures

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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