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Small Caps Surge Following Powell Speech, Stocks Finish Week Higher

Friday, August 27, 2021 04:12 PM | Nick Dey
Small Caps Surge Following Powell Speech, Stocks Finish Week Higher

Small caps led a rally Friday as all major indices posted strong gains to conclude the week.

Helping stocks rally today was a speech by Federal Reserve Chair Jerome Powell. The speech - as expected - didn’t elaborate on when asset purchases would be scaled back, but did reiterate that we remain on track to begin that at some point this year despite the spread of the delta variant.

Jackson Hole

Throughout this whole week, there has really been one event that kept investors attention, the Jackson Hole Economic Symposium, which is one of the longest-standing central banking conferences in the world and has historically addressed critical themes such as the infamous “Housing, Housing Finance and Monetary Policy” theme in 2007, which was initially viewed as a boring topic when announced, but quickly became relevant to all as the housing market collapsed shortly before the meeting took place.

This time around was likely another memorable meeting, with the virtual meeting titled “Macroeconomic Policy in an Uneven Economy.” Fed Chair Jerome Powell’s speech Friday morning was the key event that investors were looking forward to. In particular, clues on when the tapering of asset purchases will start, as well as when the liftoff of interest rates may occur were expected, while investors more recently started to wonder if there might be changes in tone due to the rampant spread of the delta variant.

Powell maintained the Fed's previous position that a reduction of asset purchases is likely to start this year, saying the economy has made “substantial further progress” towards the Fed’s inflation objective, which was a precondition to tapering asset purchases.

While that cleared some confusion regarding the path to tapering, Powell muddied investor’s understanding of the path forward saying that the Fed views the labor market as having made “clear progress towards maximum employment,” but remains off-target. The Fed is aiming to avoid an “ill-timed policy move” as “substantial slack” remains in the labor market.

While Powell didn’t tell us much more than he had before about the timing of reductions, the Fed Chair did separate the Fed’s two economic boosters: asset purchases and near-zero interest rates. Powell said the “timing and pace” of reductions should not be viewed as a “direct signal” about interest rate liftoff. The Fed has a “substantially more stringent test” for raising rates he said.

Economic Recap

In addition to the Fed symposium, there were a number of interesting economic updates this week.

First up this week was a housing market update. Existing home sales on Monday came in at an annualized rate of 5.99 million, against estimates for an annualized rate of 5.85 million. The key takeaway from this report was that, despite a better than expected reading, there remains a shortage of houses available for sale, which is making finding affordable housing increasingly difficult for potential home buyers. The median existing home price came in at $359,000, which is 17.8% higher than it was last year.

New home sales were reported Tuesday and showed an annualized rate of 708,000 new homes sold, against estimates for 700,000 new homes sold. This told a similar story as extremely high demand across the board makes it less enticing for home builders to build lower-priced homes. One year ago, 73% of new homes sold were under $399,999, today just 51% of new homes sold fit that price range.

Core PCE prices for July were released Friday and were in-line with estimates for growth of 0.3%. Personal income rose 1.1% against estimates for a small bump of 0.2%, while Personal Spending rose 0.3% and missed estimates of a 0.4% rise. The key takeaway from this report is that inflation is remaining persistently high, reaching a 30-year high during July.

Lastly, the University of Michigan’s Consumer Sentiment reading for August was at 70.3 and was mostly in-line with the preliminary reading of 70.2. The decline from July's final reading of 81.2 is was one of the largest dips since 1978. The key thing here is how inflation trends, particularly through shortages, continue to worry consumers.

All told, the S&P rose 1.52% this week, while the Dow added 0.96%, the Nasdaq added 2.82%, and the Russell 2000 surged 5.06%.

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