Market Monitor: June 17, 2022, Update

Headlines and Highlights
  • Stocks extend 2022 descent: The S&P 500’s 5½-month decline became a formal bear market – 20% decline from the peak – as concerns about inflation and fast-rising rates accelerated its slide. The large-cap index was down 23% for the year to date ahead of the weekend, small caps were down 25% and the tech-focused Nasdaq was down over 30%. International developed and emerging-markets stocks have narrowly avoided bear-market levels.
  • Fed intensifies inflation fight: The Federal Reserve boosted its benchmark interest rate by the most since 1994 in a stepped-up effort to quash inflation. The 0.75-percentage-point increase, lifting the federal funds rate to a range between 1.5% and 1.75%, came after consumer prices rose in May at the fastest pace in 40 years. The move showed the Fed has shifted its main focus to price stability as it believes the robust labor market demonstrates a still-strong economy.
  • Bond yield hits 11-year high: The yield on the benchmark 10-year Treasury note climbed to its highest level since 2011 as bond investors worried that persistent inflation could prompt the Fed to hike rates more aggressively. The 10-year yield, closely watched as an indicator of investor confidence, neared 3.5% before retreating to 3.2%. Bond prices fell as the yield rose.
Chart of Interest

Selected Market Returns

Bear territory: This is the 11th U.S. bear market since 1950. Duration and outcomes vary widely, but stocks generally have performed well over the next 12 months.
Sources: LPL Research, Standard & Poor’s 500 Index Price Data, Altair Advisers

Our Views
  • While core inflation is moderating as expected, the continuing surge in energy and food prices has complicated the overall inflation outlook. The Federal Reserve acknowledged the trend this week in both raising the federal funds rate by an unusually large amount and increasing its prediction for year-end inflation to 5% (as measured by the PCE price index). We expect inflation to come down modestly in the second half of the year, but it is likely to remain at a relatively high level historically into 2023.
  • Higher “headline” inflation readings are primarily due to the Ukraine war, China’s Covid lockdowns and global supply-chain issues, none of which are controlled by monetary policy. While the Fed’s task of lowering inflation without damaging the economy has become incrementally more challenging because such factors are outside the central bank’s influence, we remain committed to our outlook and positioning.
  • Economic reports this week showed that industrial production rose for a fifth straight month, retail sales excluding autos also increased, jobless claims fell, and the leading economic index edged lower but remained near a historic high. Our base-case scenario is that a recession is not imminent given data that continue to show the U.S. economy, while slowing, staying on solid footing. Even if a recession does occur, we do not believe it will be deep or long-lasting.
  • Further volatility is likely in the stock market before it begins a sustainable recovery, yet we are approaching levels at which we see compelling opportunities to increase risk. We believe this bear-market decline is likely closer to the bottom than the top, since deeper bear markets are typically due to a credit or liquidity crisis that is not present today.
  • The latest jump in the 10-year Treasury yield mirrors market expectations for the federal funds rate, which traders now anticipate could reach 3.5% by year-end. We believe yields should stabilize now that those expectations are priced into the market, enabling them to stay range-bound for the remainder of the year.

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