Weekly Market Report: June 17, 2022
Global central banks, inflation, and war in Ukraine combined to send equity markets to a second consecutive 5%+ decline as investors buckled up for a notable increase in the likelihood of recession. A primary driver was that the Fed made it pretty clear it had no intention of acknowledging financial conditions by stepping in to pause or ease or provide liquidity, unlike 1966 and 1987 – the only two bear markets on record that occurred without a recession in the general vicinity. Interest rates one year and shorter climbed 0.25% while maturities from 2yrs to 30yrs moved up a more modest 0.10%. Commodity markets fell 6% on the back of oil falling nearly 10% back to $109 and industrial metals were soft in reflection of global growth concerns.
- The Fed hiked interest rates by 75bps on Wednesday, above the 50bp rate hike plan it had telegraphed at its previous meeting and made clear their renewed focus on issues being presented by headline inflation. The FOMC dot plot projections were also revised sharply higher.
- With ample red ink to swim in this week, we’ll note some green which is clearly evident in nearly all post WWII data showing equity market returns following bear markets, 15% quarterly drops, and 20% or worse six month drops.
- It’s been really rough sailing with nine of the last ten weeks closing out on a decline, something only three other periods can claim – 1970, 1982, and 2001.
- The year-to-date decline in S&P Growth of -30% versus S&P Value of -15% has brought their relative valuations quickly back into neutral territory and U.S. large caps (15.4x), U.S. mid-caps (11.1x), and small caps (10.8x) overall have fallen back into fair to cheap range.
- With inflation, and specifically the one including food and energy, now seemingly the focus of the Fed, the individual components and their trends warrant close attention.
- Recovery in U.S. labor market participation is a key underpinning to a more muted recession scenario potentially allowing payrolls to keep growing while the unemployment rate rises.
- Credit spreads in the bond market provide a good barometer of the overall economic anxiety level in the market and while high yield (above 5%) and investment grade (above 1.45%) are not yet at extreme levels, high yield CDS has risen to a new cycle high.
- Investor sentiment has fallen into extreme bearish territory with 19.4% bulls, 22.2% neutrals, and 58.3% bears while LEIs and industrial production and goods orders are showing the wear and tear of inflation.
- In an emergency meeting on Wednesday, the ECB pledged to “apply flexibility” when reinvesting PEPP proceeds and to address uneven impacts of policy normalization across jurisdictions.
- The BoJ stuck with its ultra-doveish policy keeping its target rate at -0.1% and reiterating its 10yr JGB target yield around 0% while the BoE hiked rates by 25bps as expected.
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