Weekly Capital Markets Update

Global equity markets finished higher for the week. In the U.S., the S&P 500 Index closed the week at a level of 4,067, representing an increase of 2.57%, while the Russell Midcap Index moved 4.75% higher last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 3.32% over the week. As developed, international equity performance and emerging markets were higher returning 0.91% and -0.13%, respectively. Finally, the 10-year U.S. Treasury yield moved higher, closing the week at 3.31%.

During the shortened trading week after Labor Day, domestic equity markets broke a three-week negative trend and finished the week with positive gains. Within the remainder of this update, we will analyze the economic and market events that affected equity markets over the past week.
As has been the case for many weeks, the outlook for interest rates has been the primary focus of market participants given the potential impact on the prices of stocks and bonds. With the September Federal Reserve Open Market Committee (FOMC) meeting scheduled for the 21st of this month, investors continue to speculate about domestic monetary policy driven by the Fed Funds Rate hikes. On Thursday, we were reminded that increasing interest rates are a global dynamic. The European Central Bank (ECB) announced a 75-basis point interest rate rise to its benchmark deposit rate. The 75-basis point rise was the largest increase for the European Central Bank on record. Christine Lagarde, the President of the European Central Bank, made it clear within her comments that additional rate hikes were likely to be enacted in the coming months. Lagarde stated, “If the data on our meeting-by-meeting exercise review suggest that we should take a high hike of our interest rates, we will do so.”

Domestically, numerous Fed officials made comments concerning the Fed’s continuing battle against inflation. Lael Brainard, the Fed Vice Chair, stated, “Monetary policy will need to be restrictive for some time to provide confidence that inflation is moving down to target.” On Friday, Fed Governor Christopher Waller echoed his colleague’s sentiments by saying, “Looking ahead to our next meeting, I support another significant increase in policy rate.”

The remarks from Fed officials and the ECB rate hike affected market sentiment as measured by the CME FedWatch Tool from the CME Group:

• There is a 91.0% probability that the Fed Funds Target Rate will be between 3.00% – 3.25%, and a 9.0% probability that the Fed Funds Target Rate will be between 2.75% – 3.00% after the September 21 meeting.

Does this seemingly high consensus opinion relative to interest rates account for the positive equity returns this past week, or was it perhaps a renewed belief by market participants that the Fed will not be as aggressive in the extent of their rate hikes following their last two meeting of 2022 in November and December? Investors should remember that market sentiment can shift quickly and randomly. We will continue to monitor market sentiment and update investors concerning monetary policy.

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 9/9/22. Rates and Economic Calendar Data from Bloomberg as of 9/9/22. 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.