North American stock markets were down slightly Monday as investors continued to adjust to the idea that inflation — as well as the efforts by central banks to curb it — is not going to go away anytime soon.

"I think the old adage, 'don't fight the Fed' is back in play," said Mona Mahajan, investment strategist at Edward Jones. "I think markets are facing at least four more rate hikes, and that puts a little bit of pressure especially on the growth and higher valuation parts of the market.”

The S&P/TSX composite index was down 37.17 points at 19,836.12.

In New York, the Dow Jones industrial average was down 184.41 points at 32,098.99. The S&P 500 index was down 27.05 points at 4,030.61, while the Nasdaq composite was down 124.04 points at 12,017.67.

Still, markets were far calmer Monday than they had been the previous Friday, when a surprisingly hawkish speech by U.S. Federal Reserve Chair Jerome Powell sent markets tumbling. Investors had hoped Powell would use his remarks Friday at an annual economic summit in Jackson Hole, Wyo. to signal the Fed’s willingness to begin easing its interest rate hiking cycle — perhaps even reversing some of its already instituted hikes as early as 2023. (The Fed’s last two hikes have been by three-quarters of a percentage point.) 

Instead, Powell made it clear that interest rates will need to continue to rise and will stay high for longer than many investors had hoped.

"What was interesting on Friday in terms of market reaction was that we saw markets not only price in potentially a 75-basis-point hike in September, but they also priced out the possibility of a Fed rate cut in mid-2023," Mahajan said.

That's significant, she added, because the six-week rally in equities markets that occurred in July and August was due in large part to a prevailing sentiment that the U.S. central bank could begin cutting rates as early as next year.

"I think Jerome Powell's message (on Friday) was clear — we are nowhere near a Fed pivot," Mahajan said.

Bond yields continued to move up Monday, and the yield curve remains inverted — an economic warning sign of possible recession ahead, Mahajan pointed out. September and October are typically volatile months for stock markets anyway, she added, another factor that points to rocky times ahead.

Still, Mahajan said she doesn't believe markets are heading back to the bear market lows of June, when recessionary fears were rampant. Inflation data from both Canada and the U.S. for the month of July indicated that inflation, while still high, is beginning to ease off. If those numbers continue to move in the right direction, Mahajan said, markets should be able to look forward to at least a pause in the rate-hike cycle by the end of 2022.

The price of gold, which investors typically purchase as a hedge against inflation, dropped Monday — another indication that markets believe peak inflation has already happened.

“The near term is challenging, but perhaps as we head towards year-end there’s light at the end of the tunnel," she said.

On the TSX, the best-performing sector Monday was the energy sector, which rode an increase in crude oil prices to gain 1.70 per cent on the day. 

Hardest hit was the capped materials index, which was down 1.33 per cent. The materials sector is home to Canada's mining sector, including gold stocks like Centerra Gold Inc. and Barrick Gold Corp which were dragged down 1.70 per cent and 1.04 per cent respectively as gold futures fell.

The Canadian dollar traded for 76.87 cents US compared with 76.99 cents US on Friday.

The October crude contract was up US$3.95 at US$97.01 per barrel and the October natural gas contract was up seven cents at US$9.34 per mmBTU.

The December gold contract was down ten cents at US$1,749.70 an ounce and the December copper contract was down nine cents at US$3.61 a pound.