Jackson Hole preview: is the summer of love for stocks coming to an end?

This is the big question that is dominating market conversations as we move towards the penultimate trading week in August. The rally fizzled on Friday, with the S&P 500 down nearly 1.3%, although some of those losses couild be down to a large number of option expiries. Even so, the fact that the S&P 500 fell on the week and snapped a 4-week winning streak suggests that momentum for this rally is losing steam. Does this mean that the rally is over? Not necessarily, but it adds to our argument that this is a bear market rally, and thus was not sustainable for the long term. However, we would acknowledge that it did exhibit some signs of being the “real deal” in recent weeks, but this week’s surge in the dollar, the collapse of bitcoin and the selloff in meme stocks, fintech, autos, retail, cruise lines, airlines, software, and industrial metals suggests to us that another leg lower in this sell-off could come back this Autumn.

The reason why we believed this summer’s rally was a bear market rally was because the drivers of stock market weakness so far in 2022 were still in play: a hawkish Fed embarking on a fast-paced rate hiking cycle, supply chain disruptions and the threat of an almighty global recession. These are all still risks, and this week’s upcoming Jackson Hole Summit will be one of the key determinants of market sentiment in our view. Below we look in detail at two events that could drive markets, and the actionable trade ideas that go with them.

1, Jackson Hole:

Global central bankers will meet from Wednesday at the annual central banker’s forum in Jackson Hole, Wyoming. We expect the big theme to be how central bankers will rein in inflation. The summit is often used as a platform for the Federal Reserve to make big policy announcements. This will be important, as the market is currently pricing in a near 60% chance that the Fed will slow their recent pace of rate hikes and hike interest rates by 50 basis points when they meet in September, compared to 40% looking for a 75bp rate hike, according to CME Fedwatch. This comes after inflation in the US showed signs of cooling, although way above the Fed’s target rate of 2% annualised inflation. This drop in inflation has led to the idea of a Fed pivot, which has helped to spur the rally in stocks, as the market assumed that inflation was past its peak. However, Fed members have sounded concerned about this message in recent weeks, thus we expect some hawkish tones to come from Fed speakers at Jackson Hole, which could put the idea of a Fed pivot to bed. It may also spark more recession fears, and a risk off market environment as we near the end of this month.

The Bank of England will also be worth watching at Jackson Hole, after last week saw double digit inflation for July coupled with a strong retail sales report. This supports more rate hikes from the BOE after the BOE predicted a sharp and deep recession for the UK that they expect will start in Q4 2022. Therefore GBP/USD is our one to watch over the Jackson Hole summit. The market is currently expecting the pound to extend recent gains, with some analysts looking for a rise to $1.1950 in the near term. However, if we get a hawkish Fed next week that sparks a selloff in stocks then we could see the dollar extend last week’s rally. If that happens, then we would watch GBP/USD support at $1.1780 from mid-July. A break below this level opens the way to $1.15.

2, August PMI reports 

The two-tier economy could be on display as we wait for the previews of the August PMI data. The market is expecting a broad decline in the S&P/ CIPS PMI reports for the major economies this week. However, the largest declines are expected to be in Europe, where the manufacturing sector is expected to slip into negative territory, and the composite index is expected to fall to 48.8 from 49.9 in July. In the UK, the composite is expected to decline to 51.1 from 52.1, due to a large decline in the manufacturing survey, while in the US, the composite is expected to fall to a notch to 47.5. Thus, Europe and the US look the worst performers, especially compared to the UK. However, this is strange since the mood music around the UK economic outlook is by far the most negative. Will this cause the pound to rally? We doubt it, as mentioned above, instead, larger declines than expected could see stocks sell off as growth fears come back to haunt the markets. However, there is one area where the UK could outperform. The FTSE 100 index has fared better than its European and US peers this year, and this may continue due to the large proportion of energy stocks in the index.

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