Economic and Market Update - June 2022

• The Federal Reserve made the largest single interest rate hike since 1994 this month, raising the Federal Funds Rate by 0.75%. Another 0.50% - 0.75% hike is expected in July as the Fed steps up efforts to try to tame persistent inflationary data.

• Inflation has been a global phenomenon, continuing to make new highs in many countries. The United Kingdom’s Consumer Price Index (CPI) rose 9.1% in May compared to last year. Canada's measure rose 7.7% over the same period.

• Retail sales growth turned negative in May, declining -0.03%. The report revealed a shift in spending trends, with more spending going toward gas stations and grocery stores. This is a sign that inflation is changing consumers’ priorities.

• Following a brief rally in May, The S&P 500 reversed course and declined further in June. The index fell into a bear market, defined by being down more than 20% from its peak. The index was down –23.07% for the year at its low point on 6/16/22.

• The market’s strongest year-to-date sector performer, Energy, has also fallen prey to recessionary fears. Energy was the worst performer in June. The energy sector, measured by the XLE exchange traded fund, has now entered a bear market as well. The sector is down –20.85% from its June 8th peak.

• As the Fed more aggressively hiked rates in response to June’s hotter-than-expected CPI report, 2-year Treasury yields hit the highest levels since 2007, now sitting around 3%.

Activity in the manufacturing and service sectors within the U.S. have begun to roll over, another indication that the economy is slowing. The Fed will be welcoming this moderation in economic activity in hopes that it will slow labor market strength, which in turn may alleviate some of the wage and price pressures driving inflation.

Market declines around recessionary environments make sense as the economy and corporate earnings slow. The declines often end before it’s clear the economy is in a recession. Across the 12 recessions since World War II, the median S&P 500 peak-to-trough decline has been 24%. The index is near that level, but negative earnings revisions in the 2nd quarter could fuel additional declines.

The Federal Reserve’s ability to engineer a ’soft landing’ remains in question. A soft landing would be threading the needle in bringing down inflation through interest rate hikes without driving the economy into a recession. The Fed anticipates that as it gets more aggressive in raising rates, thus increasing borrowing costs, some level of overall demand and economic growth will be weakened. This should help with inflation, but if external forces such as  supply chain issues and high energy costs keep inflation from declining materially in the 2nd half of the year, the Fed will need to maintain or increase its level of policy tightening. That would likely mean even more of the aforementioned demand weakness among consumers and businesses, which should increase odds of a recession. Our internal market indicators are not showing any significant signs of improvement, and as a result, we will remain defensively positioned. The recent decline in commodity prices and some indications of further easing of supply chain issues are encouraging, but it’s still too early to say the highest levels of inflation are behind us. 

The purpose of the update is to share some of our current views and research. Although we make every effort to be accurate in our content, the datum is derived from other sources. While we believe these sources to be reliable, we cannot guarantee their validity. Charts and tables shown above are for informational purposes, and are not recommendations for investment in any specific security.