Market Monitor: July 1, 2022, Update

Headlines and Highlights
  • Markets end first half with meaningful losses: High inflation, tighter monetary policy and economic concerns have combined to leave stocks and bonds deep in the red for 2022 at the year’s midway point. The S&P 500 had its worst first half since 1970, small-cap stocks fared worse, and non-U.S. and real-estate stocks also remain in or near bear-market territory (down 20+%). U.S. bonds similarly are on pace for their worst year in decades as a market-wide sell-off hits all asset classes.
  • Inflation shows signs of stabilizing: Core inflation as measured by the Federal Reserve’s preferred gauge showed its smallest monthly rise in six months, evidence that inflation may be easing after reaching its highest level in four decades. The core PCE price index, which excludes food and energy, was up 4.7% from a year ago in May. Inflation with those volatile categories included was up 6.3% year-over-year and 0.6% from a month earlier, unchanged from April.
  • Economy cooling as Fed tightening has an impact: Economic data at midyear shows consumers spending less vigorously and the formerly red-hot housing market slowing amid the highest mortgage rates since 2008. The strong labor market and substantial consumer savings remain linchpins of the Fed’s campaign to bring down inflation and slow the economy without sending it into recession.
Selected Market Returns

Selected Market Returns

Sources: Morningstar, Altair Advisers

Our Views
  • Our base case is still that the U.S. economy will avoid a recession. However, perhaps more importantly, if a technical recession occurs it is likely to be mild and brief. Indeed the economy is slowing and growth has been flat to negative this year, but the labor market and other key indicators are solid and businesses and consumers are in much better shape to weather economic challenges than in past slowdowns.
  • Consumer spending has weakened but remains above pre-pandemic levels despite surveys showing consumer confidence at its lowest ebb since early 2021. With unemployment near its historic low and households in good financial shape, we believe consumers are solidly positioned to buoy the economy through this period of elevated inflation.
  • Market turbulence likely will recur periodically in the second half but should lessen following one of the worst first halves on record for both stocks and bonds. A mild recession is mostly reflected in today’s prices. Assuming no deep recession in the second half, as we expect, history suggests a modest market recovery is in the offing. Bear markets (20+% drops in the S&P 500) occurring outside of economic recessions in the post-World War II era have averaged six months in duration with a median decline of -28.9%; the current bear of five-plus months has had a maximum drawdown of -23.6%.
  • Inflation is lingering at an unusually high level for longer than expected and may remain there for much of the summer. But the increasing evidence that it may have peaked bolsters our belief that it will head lower over the course of the second half. Among other signs, commodity prices have dropped, shipping rates are down, the housing market is easing and car inventories are improving as the economy cools.
  • The Federal Reserve is likely to increase the federal funds rate by as much as another three-quarters of a percentage point at its next meeting at the end of July. That would boost the rate to 2.25% and put the Fed more than halfway toward its current estimate of 3.25% by year-end. We also see a possibility that the Fed raises less than expected if inflation moderates for the next two to three months, which would likely provide a boost for markets.

The material shown is for informational purposes only. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities, and all investments are subject to the risk of loss. While efforts are made to ensure information contained herein is accurate, Altair Advisers LLC cannot guarantee the accuracy of all such information presented. Material contained in this publication should not be construed as accounting, legal, or tax advice