CWS Market Review – August 19, 2025

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Wall Street Is Focused on Jackson Hole

This week, most of the world’s attention has been on the diplomatic meetings in Washington that are trying to end the Russia-Ukraine War. But on Wall Street, traders have been focused on the Federal Reserve’s annual late-summer conference in Jackson Hole, Wyoming.

In previous years, the Fed has used the Jackson Hole conference to announce major policy decisions. Fed Chairman Jerome Powell will be delivering his speech on Friday, and he’s expected to give greater clarity to the Fed’s plans for the economy and interest rates. This will likely be Powell’s last Jackson Hole conference as Fed chair.

The Jackson Hole shindig is sponsored by the Kansas City Fed. The KC Fed has been running the conference since 1978. It moved to Jackson Hole in 1982 because, it’s said, Paul Volcker wanted to get in some fly fishing.

Tomorrow, the Fed will release the minutes from its last meeting. In July, the Fed again decided to forgo any rate cuts. There were, however, two dissenting votes on the Fed, which is unusual. There could be more members thinking about breaking ranks, but we don’t know yet. The Fed isn’t known for its transparency, but it does like to show a united front.

The most likely scenario is to expect the Fed to cut rates next month. After that, things get a little murky. Still, I think it’s reasonable to expect at least one more rate cut between July and the end of the year. Let me be careful to say that there are still a lot of unknowns floating around out there. In recent days, for example, we’ve had conflicting news on the economy.

After reaching an all-time high last Thursday, the S&P 500 had minor drops on Friday, Monday and today. Today’s market was noteworthy because the High Beta sector again lagged the market. This is the third time this has happened in the last four days. Not long before that, there was a period when High Beta lagged for five days in a row. This is probably a reaction to lower interest rates.

Has the High Beta cycle ended? I’m not willing to say just yet. For over four months, High Beta stocks have done very well. Perhaps too well. I’m skeptical that High Beta will do well in the coming weeks and months. These recent sessions could be an omen for a longer-term rotation away from High Beta and towards Low Vol. At some point, those boring stocks will look attractive.

Now that earnings season is over, this is when we get many of the off-cycle earnings reports. In particular, many retailers are due to report this week. A lot of retailers prefer to have their quarters end in January, April, July and October. That way, the important holiday-shopping quarter isn’t cut off early. This week, we’re get earnings reports from big box retailers like Lowe’s (LOW), Walmart (WMT) and Target (TGT).

This morning, Home Depot (HD) reported earnings that were slightly below consensus. The stock rallied today as the company reiterated its full-year guidance. The company also said that it will have to raise some prices due to tariffs. I like to look at HD’s earnings because it tells us a lot about the housing sector and about many independent contractors. This is a vital segment of our economy.

We got another snapshot of the economy last Friday when the retail sales report for July was released. Wall Street had been expecting a 0.6% increase. Instead, retail sales were up 0.5%. That’s not too bad. If we strip out auto sales, then retail sales were up by 0.4% which matched estimates. If we take out autos and gas, then retail sales were up 0.2%.

This was the second month in a row that retail sales increased. That came after two months of lower sales. In fact, the retail sales number for June was revised higher. The initial report showed an increase of 0.6%. Now it’s an increase of 0.9%.

The retail sales report showed so-called control-group sales — which feed into the government’s calculation of goods spending for gross domestic product — advanced 0.5% in July after an upward revision to the prior month. The measure excludes food services, auto dealers, building materials stores and gasoline stations.

Several categories that posted solid gains, such as furniture, sporting goods and cars, also saw some price increases during the month. Because the data aren’t inflation adjusted, an advance could reflect the impact of higher prices.

Spending at restaurants and bars, the only service-sector category in the retail report, fell by the most since February. That doesn’t bode well for discretionary services spending at the start of the third quarter, said Oscar Munoz, chief US macro strategist at TD Securities.

Also on Friday, the Federal Reserve reported that industrial production declined by 0.1% in July. Wall Street had been expecting no change. The sluggish number could be a result of shifting resources ahead of new tariff policies. The Fed also revised higher the industrial production number for June to a gain of 0.4%.

Manufacturing makes up for 75% of all industrial production. The Manufacturing number for June was revised upward to no change. At the start of this year, manufacturing was doing quite well but that’s slowed down in recent months. Lower interest rates could help ease the decline. Since April, the manufacturing sector has lost 37,000 jobs.

Inflation’s Impact on the Stock Market

I often talk about inflation and the Federal Reserve, but this week I wanted to show why it’s so important. I want to show you how poorly the stock market has performed under high inflation.

I went to Professor Robert Shiller’s data library. He has stock market data going back over 150 years. I took all the monthly market gains and monthly inflation rates. I then sorted all the months by level of inflation. I then calculated the average market return by different levels of inflation.

To make things easier to read, I annualized the data. Here’s what I got:

For example, the monthly inflation was 0% in 448 months. Over those 448 months, the stock market has had an average annualized gain of 13.59%. As you can see, the stock market really takes a nosedive when inflation gets too high. The turning point is about 7.3%. As long as inflation has remained below that, the stock market has done well. Above that is the problem area. The inflation rate is currently 2.7%. The important lesson is that few things kill the stock market quite like inflation.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

Posted by on August 19th, 2025 at 6:48 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.