Last Week’s Markets in Review: Economic Data Fuels Interest Rate Debates

Global equity markets finished lower for the week. In the U.S., the S&P 500 Index closed the week at a level of 3,873, representing an decrease of 4.73%, while the Russell Midcap Index moved 5.42% lower last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned -4.46% over the week. As developed, international equity performance and emerging markets were lower returning -2.72% and -2.61%, respectively. Finally, the 10-year U.S. Treasury yield moved higher, closing the week at 3.45%.

Anticipation was high for a volatile week, but what transpired went beyond what many expected. Getting right to the point, here is a recap of what took place last week.

Monday: Markets continued their positive momentum from the week prior as market participants anticipated positive news on consumer prices. The S&P 500 would return a positive 1.06% for the day.

Tuesday: A doomsday for markets following a worse than expected consumer price index (CPI) report. CPI would ultimately increase by 0.1% in August. The increased costs of food, shelter and medical devices would more than offset the 10.6% decline in gasoline prices recognized during the month. As a result of the inflation print, the previous, yet small, probability of a 50 basis point (i.e., 0.50%) rate hike at the next Federal Open Market Committee (FOMC) meeting would be washed away. Instead, according to the CME Fed Watch Tool that we continue to monitor, the probability of a 75 basis point hike dropped from 91% to 78% and the likelihood of a 100 basis point hike moved from 0% to 22%. Just like that, the S&P 500 would experience its greatest single day loss in 2022, dropping 4.32%.

Wednesday: The pain that was experienced on Tuesday subsided slightly. Before markets opened, the producer price index (PPI) report would reveal a decline of 0.1% on a month-over-month basis and an 8.7% year-over-year increase. This result represented the lowest increase since August of 2021. Considering that producer prices are more of a leading indicator than consumer prices, it would now appear that the CPI report was not quite as bad as it seemed earlier. The S&P 500 opened and closed the day higher by 0.34%.

Thursday: A heavy docket of data releases would whipsaw the markets as the S&P initially opened lower before jumping up to 3,959 and then falling back down to 3,901, culminating with a 1.13% daily loss. Jobless claims came in at 213,000, below the consensus estimate looking for 228,000 claims. This result provided even greater conviction for Jerome Powell to be aggressive with his upcoming rate hike decision. At the same time, retail sales figures also came in better than expected, increasing by 0.3% in August, above the 0.0% consensus expectation. What was concerning in this retail sales report was the revision of July numbers that initially were reported as unchanged but were revised to show a drop of 0.4%. With consumer spending being a large contributor to gross domestic product (GDP) in the U.S., continued downward revisions in adverse territory could spell trouble and lead to another quarter of negative real GDP.

Friday: Volatility was expected with one of the four quadruple witching events in 2022 occurring. For those not aware, a quadruple witching is the result of simultaneous expiration of stock index futures, stock index options, stock options and single stock futures contracts. The main concern, however, on Friday turned out to be a poor earnings report from FedEx Corporation (Ticker:FDX) and the withdrawal of future company guidance. The poor earnings from one of the largest global shipping firms could be a canary in the coal mine for a bleak corporate earnings season and, potentially, a more serious global recession ahead. Markets reacted accordingly and ultimately finished the week down 4.73%

Perhaps this past week’s market activity was a bit of an overreaction. While there does remain great uncertainty about what the Fed may do with respect to interest rates for the balance of this year and next year, there does appear to be a silver lining. A 75 basis point, or greater, hike appears to be priced into current market expectations and could be the last such aggressive hike on the Fed’s radar. If peak hawkishness and inflation does occur in, or around, October, this should provide a potential tailwind for equities in the fourth quarter of this year.
Investors should consider all the information discussed within this market update and many other factors. However, with so much data and so little time to digest, we encourage investors to work with experienced financial professionals to help process all this information to build and manage the asset allocations within their portfolios consistent with their objectives, timeframe, and tolerance for risk.

Best wishes for the week ahead!

Equity Market and Fixed Income returns are from JP Morgan as of 9/16/22. Rates and Economic Calendar Data from Bloomberg as of 9/16/22. International developed markets are measured by the MSCI EAFE Index, emerging markets are measured by the MSCI EM Index, and U.S. Large Caps are defined by the S&P 500 Index. Sector performance is measured using the GICS methodology. CPI and PPI date from the Bureau of Labor Statistics on 9/13/22 and 9/14/22, respectively. Jobless claims from the US Department of Labor on 9/15/2022.

Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against a loss.