Investors Wary as S&P 500 Relinquishes Strong Summer Gains

Downside volatility has reappeared with markets responding sharply to Federal Reserve comments about the future of interest rates. Raymond James Chief Investment Officer Larry Adam discusses the outlook for inflation, U.S. consumer strength and various sectors.

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At the start of the summer, the S&P 500 rapidly fell into bear market territory (e.g., a decline of more than 20%) with the S&P 500 declining about 24% from its January record high. Then, despite depressed sentiment, it notched an impressive 17.4% rally – lifting optimism that the index would notch its seventh consecutive positive summertime return. However, recent weakness sadly broke that streak.

The shift from goods to services

The “summer of revenge travel” was not a misnomer. Despite elevated travel-related prices, TSA screenings skyrocketed to multi-year highs, hotel occupancies improved, and restaurant bookings reached above pre-pandemic levels. While early trends suggested that consumers felt safe returning to travel, the further easing of restrictions and testing requirements fueled the desire to travel more. On the flip side, many mass retailers underestimated the seismic shift from goods-based spending to services, resulting in bloated inventories, some 20-40% above pre-pandemic levels. As a result, sales and discounting became more common as the summer wore on – a good omen for inflation.

Real vs. technical recession

The U.S. economy posted two consecutive quarters of negative growth, (-1.6% in Q1 and -0.6% Q2), eliciting headlines claiming the economy is in a recession. However, consumers – the biggest contributor to GDP – continued to spend. Whether it was bustling vacation travel or record-setting online retail sales, consumers’ ability and willingness to spend is robust. With the job market healthy (11.2 million open jobs) and $2 trillion in excess savings, the consumer remains well-positioned.