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 3,863, representing a decline of 0.91%, while the Russell Midcap Index moved -1.12% lower last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned -1.40% over the week. As developed, international equity performance and emerging markets were lower returning -1.75% and -3.68%, respectively. Finally, the 10-year U.S. Treasury yield moved lower, closing the week at 2.92%.

Last week, several important data points for the month of June were released that may influence future monetary policy and the timing and duration of the near-certain recessionary period that lies ahead for the U.S. economy. On Wednesday, the Bureau of Labor Statistics (BLS) released the Consumer Price Index (CPI) for June. The following day, the Labor Department provided June’s Producer Price Index (PPI). Finally, on Friday, Commerce Department’s June retail sales report was released. Throughout the remainder of this market update, we will provide detailed information from each report and commentary on market reactions to the new information.

The CPI and the PPI reports for June both suggested that record high inflation remains the most vexing problem for our domestic economy. This lingering problem is one that the Federal Reserve must help reduce if there is any chance of a “Soft Landing” for the U.S. economy. CPI increased 9.1% from a year ago, exceeding the consensus estimate of 8.8%. This increase marked the fastest pace for inflation since November 1981. The monthly increase was also greater than anticipated.

Similarly, the Producer Price Index for Final Demand increased 11.3% from June of last year and 1.1% from the prior month. Three-fourths of the advance last month was due to goods, particularly energy. The combination of both data points immediately impacted market sentiment. The market perception grew that the Fed would have to become even more aggressive in its fight to lower inflation. A 100 basis points rise in rates by the Fed at the end of this month quickly became the majority opinion on Wall Street, though 75 basis points is more likely in our opinion.
On Friday morning, the markets digested the retail sales figures for June. Surprisingly, consumer spending increased during June’s inflation surge, with retail sales rising slightly more than expected. A relief rally occurred across the equity market, with the S&P 500 Index adding nearly 2% throughout the Friday trading session.

The contrast of these economic reports in conjuncture with the continuation of a relatively strong employment environment makes us ponder the potential impact of an almost certain recession that may have already begun. Can strong employment and continued consumer spending withstand the increasingly hawkish actions of the Federal Reserve and create a shallow recession? At this point, we believe that the aggressive hikes that the Fed has already implemented and the upcoming hike at the July meeting will begin to gain traction and help reduce inflation gradually over the remainder of 2022. After the July meeting, the Fed will not meet until September. At that point, we believe the Fed will turn less aggressive than many currently feel due to continued weakness in the economy and certain areas of inflation showing signs of moderation.

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!

Consumer Price Index and Producer Price Index data is sourced from the U.S. Department of Labor. Equity Market and Fixed Income returns are from JP Morgan as of 7/15/22. Rates and Economic Calendar Data from Bloomberg as of 7/15/22. 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.