By: Jeff Anderson
|Close||Weekly return||YTD return|
|US Treasury 10yr Yield||3.078%||18.4%||156.4%|
Source: Wall St. Journal
The S&P 500 finished up nearly 2% for the week while the yield on the 10-Year US Treasury Note crossed back over 3%. Inflation and recession fears continued to dominate the headlines.
Employment remains strong despite a cooling economy. The US is within a whisker of the payroll level just before the global pandemic struck. Consumers are starting to pullback on spending, even if just slightly, as high fuel and food prices continue to take a bigger cut of the wallet. The consumer had a lot of savings (or disposable income) coming out of the pandemic. Stimulus checks, along with savings accumulated because there was nothing to spend it on created a massive amount of money that eventually made its way into the economy. First it was “stuff” that was purchased. Then, as the economy opened, the consumer started spending money on trips, restaurants and other experiences. As inflation picked up and savings were drawn down, spending started to slow. Couple that with the fear of recession and you have a consumer that is either “less flush” or battening down the hatches as they forego discretionary spending. The Fed will likely raise rates by another 75 basis points at the end of July and possibly another 50 basis points in September as they continue their barrage on inflation. There is a lag between rate hikes and its effects on demand. The Fed will hopefully strike a balance where inflation is brought down, and the economy doesn’t swirl down the drain with it. Only time will tell if they can navigate this high-wire act.
Source: Wall St. Journal
Tune out the Noise:
Focus on the long-term and block out all the short-term “noise.” Inflation, or recession. Take your pick. The narrative seems to be shifting weekly between the two. Strong jobs data means a strong economy which means persistent inflation and further interest rate hikes. This bad for bonds and bad for growth stocks. Weak economic data like decelerating manufacturing activity means recession risks are higher which means inflation will come down and bonds will do better and growth stocks will outperform. This back and forth has been going on for months. What we can feel confident about is that the economy is decelerating. Inflation will eventually come down. Borrowing costs will be higher, but still historically low. House prices may decline due to higher mortgage rates. The frothy equity markets of late 2020 and 2021 are in the rearview mirror. Some normalcy is returning to capital markets even though it doesn’t feel great. With any economic slowdown, equities will signal it beforehand, and they will foreshadow better times ahead.
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