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It was another losing week for the stock market as the major indexes fell for a third straight week. The main reason for the down markets is the continuing fears about the Federal Reserve and how many more rate hikes there will be.

For the week, the Dow Jones Industrial Average was down 3.0 percent, the S&P 500 fell 3.3 percent, and the Nasdaq lost 4.2 percent. The stock market averages remain negative for the year, with the Dow down 13.8 percent, the S&P 500 down 17.7 percent and the Nasdaq down 25.7 percent year-to-date.

Friday started higher in the morning but gave up all gains and ended in the red for the day. The Dow Jones Industrial Average erased a 370-point gain in the morning to close the day down 337.98 points or 1.1 percent. The other major market indexes also gave up their gains early in the day, with the S&P 500 losing 1.1 percent and the Nasdaq losing 1.3 percent for the day.

Before the opening bell on Friday, the Labor Department released the jobs report for August, showing a gain of 315,000 new jobs last month, which was in line with expectations that estimated a gain of 318,000 jobs. The unemployment rate ticked up to 3.7 percent from the previous 3.5 percent.

Some traders believe the job market is still too hot, which will keep the Federal Reserve from slowing down its interest rate hikes. Other economists believe this job report was a Goldilocks report, not too hot and not too cold.

The strong labor market has created 3.5 million jobs in 2022, despite being, by some definitions, in a recession. Other economists believe this jobs report all but confirm the Federal Reserve will raise rates another 0.75 percent at their next meeting in September but then slow the hikes over the remainder of the year.

There are four more consumer price index reports (CPI) left in the year, which will be carefully watched for signs that inflation is easing. Traders are looking for any signal that the Fed will slow its rate hikes or even reverse them.

There are signs that inflation has already peaked. Oil and commodity prices have come down from highs earlier this year, and last week the ISM manufacturing prices paid index fell to its lowest levels this year. The ISM manufacturing prices paid index is now in line with pre-pandemic figures.

Wage gains remain steady, and the housing market is starting to cool off. It could take months to see any meaningful signs that inflation moves decisively lower, especially in areas like rent, shelter, and the broader services sector.

New York Federal Reserve President John Williams said Tuesday that he expects the interest rate to stay higher and remain at higher levels until inflation is pushed back and that a restrictive policy is necessary for some time to come.

Williams did not actually say where he wants to see rates eventually but stated he believes reducing inflation is about reducing demand and that he wants to see positive real interest rates.

Real interest rates are the nominal rate minus inflation. Currently, the rate is in the range of 2.25-2.5 percent, which is far below the Fed’s preferred core personal consumption expenditures price index inflation gauge, which was at 4.6 percent in July. As you can see, that is about -2.1 percent real rate, and they want it to be positive.

Cleveland Federal Reserve President Loretta Mester has an even more hawkish attitude saying on Wednesday that she sees interest rates going above 4 percent in the coming months. The market is pricing in a 33 percent chance of rates going to 4 percent.

In August, 20 percent of home sellers dropped their asking price, compared to a year ago when it was at 11 percent. And homes sat on the market an average of five days longer than a year ago, the first annual increase in more than two years.

The supply of homes for sale is also rising, up 27 percent from a year ago. The increase in housing supply is easing some of the anxiety of those looking to buy a home. Mortgage rates on a 30-year fixed mortgage went above 6 percent on Friday to 6.02 percent.

The week ended with a thud on Friday, with the Dow Jones Industrial Average down 1,008.38 points or 3.03 percent. The S&P 500 closed down 141.06, or 3.37 percent points, and the Nasdaq tanked by 497.55 points, or 3.94 percent.

For the week, the Dow lost 4.2 percent, the S&P 500 was down 4.0 percent, and the Nasdaq gave up 4.4 percent. All major market indexes are still negative for the year. As we head into September and October, volatility is expected to increase, especially in a mid-term election year.

Federal Reserve Chairman Jerome Powell talked Friday from their meeting at Jackson Hole, Wyoming, and the market did not like what he had to say. He stated that the Fed will use every tool available to them to fight inflation, which continues at its highest pace in 40 years.

Chairman Powell also said that he expects the central bank to keep raising interest rates to fight inflation in a way that will cause some pain to the U.S. economy. So far this year, the Federal Reserve has increased rates by 2.25 percentage points. He added that this is no place to stop or pause.

At this time, the benchmark rate is most likely near an area that economists do not consider to either stimulate or restrict economic growth.

Powell said, “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

As for restrictive policy, Powell added the following comments:

• “We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent”
• “Restoring price stability will likely require maintaining a restrictive policy stance for some time, and the historical record cautions strongly against prematurely loosening policy.”

There are still signs that inflation has already peaked, mainly due to lower energy prices. Other than oil and gas prices, prices have not shown any signs of declining.

Certain areas of the economy are starting to show signs of slowing down. Housing is falling off quickly, and economists expect the big surge in job hiring over the past year and a half is likely to slow down.

The Fed states its focus is broader than just a month or two of data and will continue to fight inflation until it gets closer to its long-range goal of 2 percent.

Even though we’ve now had two consecutive quarters of negative GDP growth, most economists agreed with Powell that the economy might be slowing, but it is still strong and resilient.

On Thursday, the government revised the second-quarter GDP report. The U.S. economy declined at a 0.6 percent annual rate, which is up from the initial GDP report of a decline of 0.9 percent.

The report still represents the second consecutive GDP decline, a figure widely believed to indicate a recession. But many economists do not think we are in a recession because of a strong labor market and consumer strength.

Consumer spending increased at an annual rate of 1.5 percent last quarter. Consumer spending accounts for almost 70 percent of economic activity in the U.S.

Inflation continues to be the main problem for the economy. Home construction dropped 16 percent. Home prices fell in July for the first time in three years, declining 0.77 percent from June.

That might seem like only a small decline, but it is the largest monthly decline since January 2011 and the second-worst July for the housing market since 1991. The worst July for housing was a decline of 0.9 percent in July 2010, during the Great Recession.

The housing market remains out of reach for many Americans as housing affordability is at its lowest level in 30 years. To qualify for a new home today, it requires 32.7 percent of the median household income to buy the average home with a 30-year mortgage and a 20 percent down payment. The 25-year average is 23.5 percent

The price for a home was 14.3 percent higher in July 2022 compared to prices in July 2021. Some markets are seeing large declines in home prices over the last few months, including the following cities:

• San Jose, CA: -10 percent
• Seattle, WA: – 7.7 percent
• San Francisco, CA: – 7.4 percent
• Los Angeles, CA: – 4.3 percent
• Denver, CO: – 4.2 percent

Mortgage rates climbed a little last week. According to Freddie Mac, the weekly mortgage rate for a 30-year fixed rate mortgage is 5.5 percent, which is up 0.42 for the week, and up 2.68 percent for the past year.

Friday was options expiration day, with $2.3 trillion of options expiring. For the day, the Dow Jones Industrial Average was down 292.30 points or 0.86 percent, the S&P 500 was down 1.29 percent, and the Nasdaq was off 2.01 percent.

For the week, the DJIA finished down 0.2 percent, the S&P 500 was down 1.2 percent, and the Nasdaq declined 2.6 percent. The major market indexes remain in the red year-to-date, with the DJIA down 7.2 percent, the S&P 500 down 11.3 percent, and the Nasdaq is in the red by 18.8 percent.

Last week ended the 4-week winning streak for the S&P 500 Index. There is some talk that the recent string of positive weeks for the market has been nothing more than a bear market rally, which is now ending.

The Federal Reserve July meeting minutes came out last week. The main takeaway from the meeting shows that the Federal Reserve is not likely to pull back on the interest rate hikes until inflation comes down substantially.

As we have heard for several months now, the Federal Reserve has expressed they will not stop fighting inflation until it comes down or near their desired level of 2 percent. The Fed minutes did not offer guidance for future rate hikes but said they will be watching the data before making the decision at their next meeting on September 20 and 21.

Currently, the market is pricing in a 50 basis point rate hike at the next meeting. The minutes indicated that the current federal funds rate of 2.25 percent – 2.50 percent is near the neutral level, which is neither restrictive nor supportive of economic activity. Some officials believe a more restrictive stance might be necessary.

The Fed acknowledged they are aware of the risk of moving too aggressively. But on Thursday, St. Louis Fed President James Bullard said that he hasn’t seen evidence in the data that inflation has peaked yet. He also said that he is likely to vote in favor of a 75 basis point rate hike at the September meeting.

On Wednesday, the Census Bureau reported July sales and retail activity came in flat. The headline number is a bit misleading since the main drag on the report was lower gas station sales as fuel prices continue to fall. Earlier this year, the average gallon of gasoline topped $5. As of August 20, the nationwide average price is $3.908 for a gallon of regular gas.

Excluding gasoline and auto sales, retail sales rose by a healthy 0.7 percent over last month. Online sales are up sharply, with increases also reported in restaurant sales, goods, and leisure spending. The report continues to show the strength of the consumer.

The housing market continues to show signs of distress as the sales of previously owned homes fell 5.9 percent in July compared with June. Homes sales count dropped to a seasonally adjusted annualized rate of 4.81 million units.

Home sales are down 20 percent from the same time a year ago. The housing market is still facing a supply problem, with 1.31 million homes for sale in July, which is unchanged from July 2021. That represents a 3.3-month supply.

Demand is not as strong as it was, and affordability is still a major problem for potential home buyers as prices continue to remain high. The median price of a home in July was $403,800, which is an increase of 10.8 percent over last year.

Even though the median home sales price continues to increase, it is at a slower pace of increase for the fifth straight month. Current homes listed are almost twice as likely to show price cuts compared to this time last year.

First-time home buyers represented only 29 percent of buyers in July, compared to the historical average of 40 percent. Rents are high and still rising, making it even harder for first-time buyers to save for a down payment.

The housing market is still moving fast. In July, the typical home went under contract in only 14 days. A year ago, it was 17 days.

As of Saturday, August 20, the average rate for a 30-year fixed mortgage is 5.66 percent. That is 12 basis points higher than a week ago.