Market Monitor: May 27, 2022, Update

Headlines and Highlights
  • Markets trim 2022 losses: Stocks rose this week after the Standard & Poor’s 500 Index had fallen briefly into bear-market territory – down 20% from January’s all-time high – benefiting from solid corporate earnings and less-hawkish comments by the Federal Reserve. Through Thursday, returns from the large-cap index were down 14.4% for the year, the small-cap benchmark was down 17.8% and many growth stocks were down further amid investor worries about rising interest rates and a cooling economy. Bond returns are positive for May, poised for their first monthly gain since November, with the 10-year U.S. Treasury yield falling back below 3%.
  • CBO forecasts economy to hold steady through rate hikes: The Congressional Budget Office projected above-average growth and low unemployment through the rest of the year as the U.S. economy remains solid amid the Federal Reserve’s monetary tightening. The report by the nonpartisan CBO revised upward its estimate of U.S. GDP for 2022 to 3.1% and sees the Consumer Price Index declining to 4.7% by year-end. The report suggests the Fed will be able to carry out its rate increases and balance-sheet reductions without causing a recession.
  • Inflation shows smallest monthly increase in 18 months: The Federal Reserve’s preferred measure of inflation slowed its pace in April for the first time this year. The core personal consumption expenditures price index rose 0.3% from the previous month and was up 4.9% from a year ago, leaving it still near the highest in four decades. The Commerce Department report also showed household spending still on the rise as consumers drew from savings.
Chart of Interest

market monitor

Off the peak: Excluding food and energy prices, inflation lessened significantly last month.

Sources: U.S. Bureau of Economic Analysis, Altair Advisers

Our Views
  • Despite slowing growth in the U.S. economy, we believe a recession this year remains unlikely. Although higher interest rates and inflation are slowing some areas of the economy, such as the housing market, the overall economy is still solid. The labor market remains strong, rising retail sales in each of the past four months testify to consumers’ resilience, business spending is still trending higher, and leading economic indicators remain stable. Taken together, we expect continued moderate growth into next year.
  • Further market volatility is likely as investors absorb continued monetary tightening by the Federal Reserve and react to changing economic data. We anticipate stocks to increase from their current level by year-end, based on the economy’s fundamental strength. The five previous worst starts for the S&P 500 through 100 trading days (this past Wednesday in 2022) saw a positive return for the rest of the year in every instance, with a median gain of 15%, according to LPL Research.
  • Inflation is showing early signs of moderating and we expect the trend to continue in coming months. While it is likely to remain well above the Fed’s 2% target into next year, cooling is evident in parts of the economy since rate increases began in March – home construction, mortgage demand, building permits, and declines in inventories and delivery times. The data point to solid early progress in the central bank’s efforts to tamp down excesses and price growth.
  • Bonds’ performance has stabilized and we expect them to resume their role as valuable contributors to portfolio diversification after their historically poor start to 2022. The 10-year U.S. Treasury yield, which moves in the opposite direction from prices, declined from a four-year high of 3.1% to 2.7% over a two-week period this month. The drop reflected not only investors’ recession concerns but the fact that much of the expected rise in interest rates had already been priced into the bond market.
  • The Federal Reserve is likely to proceed with two half-percentage-point increases in the federal funds rate at its June and July meetings. We expect it would slow the pace of tightening this fall, assuming the pace of inflation continues to ease. A return to a higher inflation rate this summer would force the Fed to act more aggressively.

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.