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 3,825, representing a decrease of 2.18%, while the Russell Midcap Index moved 2.17% lower last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 1.16% over the week. As developed, international equity performance and emerging markets were lower returning -2.18% and -1.53%, respectively. Finally, the 10-year U.S. Treasury yield moved lower, closing the week at 2.88%.

Having paused to celebrate the birth of our great nation over the past weekend, we thought it might be a good time to reflect on the first half of 2022 and focus on the remainder of the year. The first half of the year has been dominated by great uncertainty, and persistent volatility as record-setting inflation levels have slowed economic growth and turned the Federal Reserve more hawkish. For the uncertainty and the volatility to abate, inflation will have to come down considerably, or the economy will need to show real positive growth. This combination would equate to the “soft landing” the Federal Reserve is trying to navigate. We believe that the U.S. has entered an economic slowdown, likely resulting in a relatively short and shallow recessionary period (which may have begun already). Throughout the remainder of this update, we will review some of the major economic events from the past week and how they may impact any hopes of a potential “soft landing.”

The Federal Reserve Stress Test Results report was released at the beginning of the past week. This test assesses whether the nation’s largest banks have sufficient capital strength to absorb losses during a severe recession. All the banks within this test passed. A banking industry that can continue to provide loans to the public during the current slowing economic period could be an important factor in limiting both the severity and length of a potential recession.

Chairman Powell participated in a European Central Bank (ECB) forum on Wednesday. Powell reiterated his tough talk on inflation in the U.S. and stated that achieving a “soft landing” is still possible while acknowledging that, “It’s gotten harder…The pathways have gotten narrower.” The Chairman finished his comments with a hopeful point concerning the strong labor market (unemployment is near a half-century low at 3.6%) by saying, “Overall, the U.S. economy is well-positioned to withstand tighter monetary policy.”

According to a Commerce Department report, inflation maintained its record-high levels in May. The Fed’s preferred inflation measure, Core personal consumption expenditures, rose 4.7% from a year ago but was 0.2 % less than it recorded in April. This reading was slightly below the Wall Street consensus of 4.8%. Additionally, the Commerce Department report showed growing pressure on consumer spending. During the month of May, spending adjusted for inflation fell 0.4%, a sharp drop from the 0.3% gain in April.

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.

Happy (belated) 4th of July to all, and best wishes for the week ahead!

Federal Reserve Stress Test Results are sourced from the Federal Reserve System. Core Personal Consumption data is sourced from the U.S. Department of Commerce. Equity Market and Fixed Income returns are from JP Morgan as of 7/1/22. Rates and Economic Calendar Data from Bloomberg as of 7/1/22. 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.