Editor
The impressive winning streak for US stocks hit a bump in the road on Friday, as a selloff swept through the market after new data revealed persistent inflation. This downturn, primarily driven by a significant drop in tech stocks, gave Wall Street a chance to take a breather and reflect on just how much progress the Federal Reserve is—or isn’t—making in tackling rising prices.
The Dow Jones Industrial Average dipped about 0.5%, while the S&P 500 fell by 0.8%, both pulling back from the record highs they had just achieved the day before. However, it was the tech-heavy Nasdaq Composite that took the hardest hit, plummeting over 1% as investors grew wary of the sector’s lofty valuations. Leading the charge downward was chipmaker Nvidia, which dropped more than 3% to wrap up a tumultuous week following its eagerly awaited earnings report.
The Inflation Tug-of-War
Markets were glued to the latest inflation report, and honestly, who could blame them? The Personal Consumption Expenditures (PCE) index, which the Fed favors as a gauge for consumer inflation, ticked up by 0.3% in July, right in line with what economists were predicting. Year over year, the index jumped to 2.9%—just a notch above the Fed’s 2% target and the quickest increase we’ve seen since February. While this data wasn’t entirely unexpected, it certainly served as a wake-up call to the market’s recent optimism.
“The Fed has to be rethinking things now,” remarked Mark Peterson, a senior market strategist at Oakridge Capital. “We’re witnessing a strong economy, but inflation is creeping back up. That makes any potential rate cuts in September a lot more complicated.”
Adding to the worries was another report from the University of Michigan, which indicated that consumer sentiment has dropped to a three-month low. The survey showed that consumers are bracing for inflation to rise in the coming year, a belief that could very well become a self-fulfilling prophecy.
Tech’s Turbulent Week
The recent downturn in the tech sector really underscored just how fragile the rally has been, largely fueled by some impressive gains from a select few megacap stocks. Nvidia has definitely been the standout example of this trend. After an incredible earnings report that sent its shares soaring, investors decided to cash in on their profits on Friday.
“This is a classic case of ‘buy the rumor, sell the news,’” said Anya Sharma, an analyst at Global Insights Group. “Nvidia’s earnings were undeniably impressive. But with the stock having climbed so high, it was just waiting for a pullback, especially in a risk-averse environment like we experienced today.”
The overall sentiment in the market was also dampened by the ongoing situation with Federal Reserve Governor Lisa Cook, whose request for a temporary restraining order against her removal was reportedly under consideration by a judge on Friday. This whole saga has added an unexpected layer of political uncertainty to the Fed’s policy outlook.
A Rally Unbroken?
Despite the selloff on Friday, the major indexes are still on track to wrap up an impressive month. The Nasdaq is gearing up for its fifth consecutive monthly gain, marking a winning streak we haven’t seen in over a year. Meanwhile, the S&P 500 and the Dow are set to extend their winning streaks to four months, showcasing the market’s solid foundation and the persistent belief that the Fed will eventually shift towards rate cuts. The Russell 2000, which focuses on smaller companies, is also looking at a significant jump in August, marking its fourth straight monthly gain—the longest stretch in four years.
“One bad day doesn’t break a trend,” Peterson noted. “While today served as a reminder of the challenges ahead, the bulls are still in charge. The real challenge will come when the Fed has to decide if it can genuinely meet the market’s expectations for rate cuts.”
With markets closed on Monday for the Labor Day holiday, investors have a long weekend to reflect on the tricky balance between economic growth and inflation. How that debate unfolds will likely shape whether this remarkable rally carries on into the fall.
