Market Monitor: June 3, 2022, Update

Headlines and Highlights
  • Markets mixed in turbulent May: Some stock benchmarks eked out positive returns last month while others were negative again as concerns about rising rates and inflation continued to hurt 2022 performance. Growth stocks and REITs still struggled while value stocks, international stocks and bonds performed well. Markets dipped lower again in early June.
  • Labor market gains underscore economy’s strength: U.S. employers added 390,000 jobs in May, extending a year-long streak of strong growth in the job market as the unemployment rate held steady at 3.6%. Wage gains – a major contributor to inflationary pressure – moderated from their more rapid pace of recent months, rising 5.2% from a year earlier. The labor market has added more than 6.5 million positions in the past year and is on pace to return to pre-pandemic levels this summer.
  • Fed starts shrinking $8.9 trillion balance sheet: The Federal Reserve began reducing its massive balance sheet this week, initiating “quantitative tightening.” The move is part of the central bank’s post-pandemic policy normalization – letting debt expire after doubling the balance sheet to support the economy when it was under duress because of COVID-19. The Fed also is expected to raise the federal funds rate by another half-percentage-point at its mid-month June meeting.
Selected Market Returns
Selected Market Returns
Returns as of May 31st

Sources: Morningstar, Altair Advisers

Key Takeaways
  • The S&P 500’s 6.6% rally last week was the strongest for the index since a 7.3% rise during election week in 2020 and was fueled by solid corporate earnings. The growth stocks that led the market sharply higher during the first two years of the pandemic continue to significantly underperform, however, and remain in bear markets (down more than 20%). Indexes measuring performance of both the biggest 1,000 and biggest 2,000 U.S. growth stocks were down 21.9% and 24.7%, respectively, for 2022 through the end of May.
  • U.S. economic growth expectations have declined recently, with the Atlanta Federal Reserve reducing its forecast of second-quarter real GDP growth to an annual pace of 1.3%. Yet demand for goods, services and labor remain strong, reflecting businesses and consumers in solid shape. Leading economic indicators point to moderate growth for the rest of the year.
  • The economy’s resilience in the early months of monetary tightening improves chances of a “soft landing” – slowed growth but no recession as a result of the Fed’s interest-rate increases. The central bank is expected to continue boosting rates into 2023, based on its own and Wall Street’s projections.
  • Inflation remains far above normal levels worldwide and is likely to stay elevated in the months ahead, even with U.S. inflation showing signs of having peaked. Annual inflation in the 19-nation eurozone reached a record high of 8.1% last month. The region now faces stiff additional economic pressure under the European Union’s newly adopted partial embargo on Russian oil imports as part of sanctions against Moscow for the war in Ukraine.
  • Bonds staged an about-face in the last two weeks of May following their worst slump in over 40 years. Tax-exempt municipal bonds led the way as demand surged and tax-exempt yields fell even further than Treasury yields, pushing prices higher.

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