Weekly Capital Markets Update

Global equity markets finished lower for the week. In the U.S., the S&P 500 Index closed the week at a level of 3,675, representing a loss of 5.75, while the Russell Midcap Index moved -6.13% lower last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned -7.43% over the week. As developed, international equity performance and emerging markets were lower returning -5.73% and -4.65%, respectively. Finally, the 10-year U.S. Treasury yield moved higher, closing the week at 3.25%.

In a week that saw meaningful declines across the equity markets, almost all attention was focused on the results of the June Federal Open Market Committee (FOMC) meeting and Chairman Powell’s subsequent press conference.

Prior to the Wednesday meeting, markets were busy digesting the Consumer Price Index (CPI) results that were released on Friday, June 10, in anticipation of how the Fed would react to the hotter-than-expected inflation reading. Before the past week, most of Wall Street believed that Chair Powell would follow his guidance from May and increase the rate by 50 basis points. Our readers may recall that Chair Powell had stated in May that future hikes above 50 basis points were not under consideration.

On Wednesday, the Fed raised the Fed Funds Target Rate by 75 basis points (0.75%). They also updated their “Dot Plot” chart, which the Fed uses to signal its potential path for future rate hikes, in a meaningful way. The revised median consensus Fed Funds Rate for the end of 2022 now stands at 3.4%, significantly higher than the 1.5% consensus rate that the previous chart indicated. In other areas, the Fed also revised its outlooks for the end of 2022 as follows:

• Unemployment (from 3.5% to 3.7% – it is currently at 3.6%)
• Economic (GDP) growth (from 2.8% to 1.7%)
• Inflation (from 4.3% to 5.2%)

These policy announcements represent a renewed Fed that is dealing with unprecedented inflation. The 75 basis point hike represents the largest rate increase to the Target Rate since 1994 and the first time the Fed has increased the target rate by 75 basis points while the S&P 500 was trading in the bear market territory. Separately, we believe that the Fed may need to increase the pace of balance sheet reductions (currently $8.5 trillion balance). Reducing the balance sheet will have a greater impact on the longer end of the yield curve and hopefully avoid the possibility of a prolonged period of yield curve inversion. Navigating a “Soft Landing” is becoming even more difficult for the Fed. Increasing interest rates within a slowing economy with the current level of inflation is a tall task.

Investors should consider all of 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 of 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 6/17/22. Rates and Economic Calendar Data from Bloomberg as of 6/17/22. 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.

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.

Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.

Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.

Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk, especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than the original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.

Definitions

MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.

MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.

Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.

ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.

ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.

Investors cannot directly purchase any index.

LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.

The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.

The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.

DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.