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Weekly eNews: June 13, 2022

Financial Market Update

Welcome to the StrategicPoint Financial Market Update — a market and economic overview of what occurred last week and what’s up for this week. Please find our market commentary and most recent Blog posts in our StrategicPoint of View®.

Last Week

U.S. stocks tumbled with their biggest losses in three weeks, and Treasury yields rose by 20 basis points as inflation continued to push higher. Each of the benchmark indexes listed here declined, led by the Nasdaq and the S&P 500, which dropped by more than 5.0%. Crude oil prices rose marginally, the dollar inched higher, while gold prices rose by more than $22.00 per ounce. Last Friday, the latest data showed that the Consumer Price Index rose 8.6% in May from one year earlier, the fastest pace since 1981. Several factors are driving price pressures including the Russia/Ukraine war, which has impacted energy and crude oil prices; supply-chain disruptions; China’s economic lockdown in response to rising COVID cases; and a tight labor market, with demand for workers far outpacing supply, driving wages higher. Demand for travel and other services has surged with the onset of summer and the receding impact of COVID-19, pushing up prices for airline fares, hotels, and dining. Unfortunately, higher prices are cutting into profits for many businesses. Also, in its attempt to temper inflationary pressures, the Federal Reserve is likely to step up measures to tighten spending by raising interest rates further increasing the cost of borrowing and doing business. For consumers in general and investors in particular, higher prices are likely to impact consumer spending and slow economic activity.

Stocks posted modest gains last Monday. A sell-off in Treasuries sent 10-year yields above 3.0% for the first time since mid-May. The Nasdaq gained 0.4%, while the Global Dow, the Russell 2000, and the S&P 500 rose 0.3%. The Dow eked out a 0.1% advance. Crude oil prices slipped marginally, closing at around $118.50 per barrel. The dollar advanced, while gold prices fell more than $5.00 to $1,845.10 per ounce. China is set to begin easing COVID-related restrictions that could help ease supply-chain pressures. Elsewhere, the European Central Bank is about to end bond purchases and increase borrowing costs, likely in July.

Equities pushed higher last Tuesday led by energy and tech shares. Stocks recovered from a dip early in the day following news that a major retailer cut in its profit outlook. A drop in bond yields helped fuel the surge in stocks. By the close of trading last Tuesday, the Nasdaq and the S&P 500 rose 1.0%, the Dow gained 0.8%, the Russell 2000 jumped 1.6%, and the Global Dow increased 0.3%. Ten-year Treasury yields fell 6.6 basis points to end the day at 2.97%. Crude oil prices continued to push toward $120.00 per barrel after ending the day at $119.63. The dollar slipped lower while gold prices advanced.

Stocks slid lower last Wednesday following a two-day rally. Each of the benchmark indexes lost value, with the Russell 2000 falling nearly 1.6%. The Nasdaq dropped 1.1%, the Dow lost 0.8%, while the S&P 500 and the Global Dow dipped 0.7%. Bond prices declined, with yields on 10-year Treasuries rising 5.7 basis points to reach 3.02%. The dollar and gold prices increased. Crude oil prices continued to advance, climbing another $3.14 to hit $122.55 per barrel. Rising crude oil prices and related gas price increases are prompting concerns that economic growth will be stifled and corporate earnings will take a hit.

Last Thursday saw stocks extend their slide as investors contemplated more economic growth concerns following the European Central Bank’s intention to hike interest rates by a quarter-point next month. Each of the benchmark indexes listed here fell by nearly 1.9%. Ten-year Treasury yields remained above 3.0%, the dollar rose, while gold prices dipped lower. Crude oil prices slipped, down $0.75 to close around $121.36 per barrel.

Investors withdrew from stocks last Friday after the latest jump in the Consumer Price Index likely signaled more economic tightening. The Nasdaq plunged 3.5% on the day, followed by the S&P 500 and the Global Dow (-2.9%), the Dow (-2.7%), and the Russell 2000 (-2.6%). The yield on 10-year Treasuries jumped more than 11 basis points to close at 3.15%. Crude oil prices retreated to $120.49 per barrel. The Dollar rose against a basket of currrencies. Gold prices climbed nearly $23.00 to reach $1,875.60 per ounce.

S&P 500: 3,900 (down 5.05% for the week and down 18.16% for the year)
NASDAQ: 11,340 (down 5.60% for the week and down 27.52% for the year)
Dow: 31,392 (down 4.58% for the week and down 13.61% for the year)
US Treasury 10yr: 3.15% (from 2.95% last week)
Crude Oil: $120.49 (from $120.26 last week)
Gold: $1,875.60 (from $1,853.90 last week)
USD/Euro: $1.0518 (from $1.0719 last week)

 

StrategicPoint of View®

Market Commentary – Two Sides of the Same Coin: Inflation and Recession

Humor me while I repeat myself. There are some points worth making more than once. Especially when it comes to inflation, recession, and the stock market.

In my May 2, 2022 Blog, “What’s Up with Current Market Volatility,” I referenced the following:

  • The Federal Reserve oversees the control of inflation. The key tools the Fed uses are raising interest rates to curtail demand and paring back government debt which reduces available money to spend and invest.
  • Markets fear that the Fed will need to act too aggressively to combat inflation, raising interest rates significantly and driving the economy into a recession.
  • The jury is out as to whether the US will actually go into a recession.
  • Until markets are convinced that the cure for inflation will (or will not) drive us into a recession, markets will remain volatile.

We saw more evidence of that volatility on Thursday and Friday of this past week as markets first anticipated, and then reacted to, higher inflation. Investors hoped that inflation would be peaking by now. Instead, the year over year inflationary increase was 8.6%, a forty-year high. While higher prices were concentrated in categories related to energy and food (gasoline, airline tickets, groceries), there were few sectors immune from inflation’s grasp.

Economists’ big fear is that inflation will become increasingly sticky, whereby consumers and businesses will ramp up their buying now ahead of expected price hikes later. We already have way too much demand – witness the backlog for cars, packed flights, and the difficulty finding anyone to provide you the services you need. And we have too little supply, exacerbated by a war that limits basic commodities like oil and wheat. Among consumers, there is little doubt that inflation is the number one problem the country is facing.

I was surprised then this week to read that that a sizeable number of people have told pollsters they also believe we are currently in a recession. Similar polls show that most Americans feel their personal financial situation is quite good, but that the economy is a mess. This is important, because while both inflation and recession are unfavorable, they are not the same.

Inflation and recession are the opposite sides of the same economic coin. Inflation is the result of an economy that is too hot, while a recession emerges when the economy turns cold. In a traditional hot economy, unemployment is low, consumers are flush, and business profits are booming. As the economy heats up, so do prices. If prices get too out of hand, as they are now, we get rampant inflation.

There is a saying that “The cure for high prices is high prices.” That is true, but often consumers do not want to wait for that cure. The Federal Reserve is assigned to step in and help bring those prices down before inflation erodes too much buying power.

On the reverse side, the U.S. economy doesn’t traditionally go into recession without labor market weakness. A recession is characterized by high unemployment, contracting income and spending, and falling business production.  In general, during a recession, many individuals are struggling financially.

Inflation and recession are both part of the business cycle – and as such they are interrelated. Ironically, policy cures for recession can lead to inflation, while different policies designed to reduce inflation can lead to recession. Not surprisingly, the time it takes to go from inflation to recession and back again, is varied and unpredictable.

The chance of a recession in any one year is traditionally around 15%. Because it is very difficult to control high inflation without causing some recessionary forces, the probability has increased.  Consolidating our research, we believe the chance of a recession in the next 18-24 months is anywhere between 35% and 50%. While that number is much more significant than 15%, a recession is not a slam dunk. These probabilities leave the markets guessing.

Why might it take another year or two for a recession to take hold? Because right now the economy is still relatively hot. And inflation’s cure has room to run before forcing a recession.

Just think, if Fed action cut job openings in half, the number of openings would roughly equal the number of unemployed looking for work. In theory, existing jobs would not be lost. And if rising interest rates discouraged some people from buying new homes, perhaps the bidding wars would cease without curtailing house sales too much. Eventually, however, if inflation became too entrenched, Fed policies could tip (or flip) inflation into a recession.

Which brings us back to the markets’ behavior last week. Not willing to wait for concrete evidence of any upcoming recession, markets reacted with fear to the increased likelihood of such an event. But since any recession might be forestalled many months, and might not even happen, the markets retreat should not be deemed definitive. At the same time, we are far from an “all clear” signal.

What might it take to get markets to settle?

  1. A pattern of month-over-month and year-over-year lower inflation numbers
  2. The Fed signaling that rate increases are slowing or pausing
  3. The end of war, or a negotiated peace in Europe
  4. Consumer binge spending waning
  5. Expectations that future prices will be lower, not higher.

Investor patience is likely required in the coming months as we wait for clarity on our economic future. Until recession probability gets much higher or much lower, market sentiment is likely to continue to vacillate, with stock prices rising and falling in alternate succession. In the meantime, the underlying economy will be regrouping and adjusting and preparing for the next coin toss.

Betsey A. Purinton, CFP®
Co-Chief Investment Officer

 

This Week

The Federal Open Market Committee meets this week. It is expected that the federal funds rate will be increased 50 basis points to 1.25%-1.50%. While indicators in April appeared to show inflation was slowing, the latest data in May has price increases accelerating at a faster pace.

 

Visit StrategicPoint.com for more!

 

StrategicPoint Promotes Laura Bard to Director of Client Experience & Strategy
StrategicPoint Investment Advisors announces the promotion of Laura J. Bard to Director of Client Experience & Strategy.

 

 

 

The Novice and The Nerd Podcast: 9 Signs of Inflation
There’s more to measuring inflation than just the monthly press release. Our episode today breaks down some other commonly used data to see what the trends in inflation show.

 

 


StrategicPoint Promotes Derek Amey to Co-CIO
In a move expected to provide long-term leadership continuity, StrategicPoint Investment Advisors announced today the promotion of Derek M. Amey to Co-Chief Investment Officer (CIO).

 

 

 

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Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Third party content does not reflect the view of the firm or of our parent company, Focus Financial Partners. LLC and is not reviewed for completeness or accuracy. It is provided for ease of reference.

Parts of this report were prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2022. Part of this content contributed by Forefield, Inc.