The Dow (-4.7%), NASDAQ (-4.8%), and S&P 500 (-5.7%) each fell sharply for the second straight week and have been negative for 10 of the last 11 weeks. In fact, the markets are down about 11% just for the month of June. Taxable bonds fell about 1% and tax-free municipal bonds dropped about 3%, erasing their recent rally.
The 800-pound gorilla continues to be inflation and the Fed’s response. Last week, the Fed raised interest rates by 0.75% (the highest rate increase since 1994) and announced they were likely to raise it another 0.75% at their next meeting in July. In their announcement, the Fed also stated they expect higher unemployment, slower economic growth, and higher inflation in 2022 than they originally expected. The housing market has begun to cool off, as building permits dropped 7% in May and housing starts fell 14.4%. Household savings have also fallen to their lowest level since 2008. These data have caused recession fears to intensify.
Yes, this is pretty ugly data, but there is some data that provides a glimmer of hope. Consumer spending represents almost 70% of the economy, and they just keep on spending. Oil prices fell 10.4% last week, reflecting the potential for reduced global demand. If this trend continues, as well as the housing market cooling, they represent two key components of inflation, which could alleviate some of the pressure of that darn gorilla in the room. Unfortunately, economists experienced a head fake with a reduced inflation number in April, so it may take two months of declining data for economists to feel a trend is moving in the right direction. That takes us out to August. The only other catalyst(s) for a market turnaround would be for the Ukraine war to cease and/or strong corporate earnings, which don’t begin to report for another month. In other words, there aren’t many catalysts to help us emerge from these lousy market for the next couple months.
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