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 3,899, representing an increase of 1.98%, while the Russell Midcap Index moved 3.80% higher last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 2.43% over the week. As developed, international equity performance and emerging markets were also higher, returning 0.97% and 0.98%, respectively. Finally, the 10-year U.S. Treasury yield increased, closing the week at 3.09%.

At this point in 2022, there is no denying the pressure and attention that market participants have placed on the U.S., and global economy for that matter, of a potential recession. As it stands right now, according to Goldman Sachs Investment Research, the risk that the U.S. enters a recession within the next year sits at 30% and increases to 50% within the next 24 months. We might argue that we are already in a recession as we will likely soon find out that we have met the technical definition of a recession. For those not aware, the technical definition of a recession to many is two consecutive quarters of negative real gross domestic product (GDP) growth. The first quarter of 2022 saw a real GDP decline of 1.6%, and the current estimate for the second quarter from GDPNow has GDP again declining, this time by approximately 2.0%. The yield curve also inverted again this week. A yield curve inversion typically occurs when the yield on 2-year U.S. Treasuries exceeds the yield on 10-year U.S. Treasuries. The yield curve in the U.S. has inverted before each recession since 1955, with a recession following between six and 24 months, according to a 2018 report by researchers at the San Francisco Federal Reserve. While all this information may concern investors, investors should recognize that recessions and market slowdowns are normal sequences of an economic cycle.

The economic cycle can be broken down into five specific phases: initial recovery, early expansion, late expansion, slowdown, and contraction (or recession). The final stage of the list is what investors are currently fearful of experiencing. According to the CFA Institute, the contraction phase, or recessionary environment, typically lasts between 12 and 18 months. During this cycle phase, the stock market typically declines early but rises in the later stages. Historically, these recessions can be steep and frightening or shallow and short-lived; in certain circumstances, the weakest markets do not even occur during recessions.

For market participants, it is important to take a step back and view market cycles as a healthy activity. If we expect markets to rise over extended periods, we must also expect them to fall during other periods. Consider the below chart from Calamos Investments. The illustration clearly shows how market performance will drag during economic slowdowns and troughs but has always recovered and posted gains following these stressful events.

It may also be helpful to note that historically, stock markets have bottomed out approximately four months, on average, before a recession ends, according to CFRA Research.

Despite having areas of weakness, certain components of the U.S. economy have remained relatively resilient in the face of negativity across headlines. For example, the June jobs data released on Friday indicated a payroll increase of 372,000 during the month, far exceeding the 250,000 consensus estimate. The unemployment rate remained unchanged at 3.6%, and average hourly earnings rose 5.1% from a year ago, which was also above consensus estimates, though not able to keep pace with persisting high inflation levels. Whether these figures will give the Federal Reserve the confidence they need to continue with aggressive rate hikes for the remainder of the year remains to be seen, but this data may have a strong influence on their potential decision to raise the Federal Funds Target Rate by another 0.75% later this month.

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.

Equity Market and Fixed Income returns are from JP Morgan as of 7/8/22. Rates and Economic Calendar Data from Bloomberg as of 7/8/22. 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.