Market Recap – Week Ending 05.06.22

Market Updates

Market Recap – Week ended May 6

Overview: Stocks vacillated last week as volatility remained elevated. In the U.S., investors evaluated guidance from the latest Federal Reserve meeting, while keeping an eye on corporate earnings and jobs data. The S&P 500 index finished down 0.2% for the week, with international stocks faring worse on poor economic data in Europe and concerns over renewed lockdowns in China. Emerging market stocks (MSCI EM) were down 4.1% for the past week, with international developed stocks (MSCI EAFE) lower by 2.8%. Bond investors were focused on the latest Fed meeting, as the central bank raised short-rates by 50 basis points (0.5%), in line with expectations. Yields initially fell after Fed Chair Jerome Powell ruled out the possibility of 75 basis point hikes at any of the remaining five meetings for the year, but reversed direction later in the week as inflation fears continue. The 2-year and 10-year Treasuries ended the week at 2.70% and 3.12%, respectively. This is the first time since 2018 the 10-year Treasury has traded above 3% in yield. As noted in the next section, markets are now pricing in a Fed funds rate of about 2.8% by year-end 2022, suggesting much of the anticipated rate hikes are priced into the bond markets. In economic data, U.S. unemployment remained steady at 3.6%, and the payroll report showed 428,000 new jobs were created, above the consensus estimate of 400,000.

Federal Reserve Update (from JP Morgan): Last week, the Fed delivered on a well-communicated 50 bps hike, bringing the Federal fund’s target range to 0.75%-1.00%. Since the intended impacts of rate hikes – cooler inflation and slower growth – happen on a lag, it’s critical to pay attention to how the Fed speaks about their outlook following each meeting, especially in light of the evolving environment we are in. On inflation, the Fed acknowledged inflationary pressures have intensified due to the Russia/Ukraine war and COVID-related shutdowns in China. In response, the Fed noted that “appropriate firming,” likely in the form of 50 bps increases in June and July, will be needed. Despite advocating for 50-bps hikes, Fed Chair Jerome Powell dissuaded against a 75-bps hike. This brought comfort to investors worried about overly aggressive tightening and provided a temporary boost to equity markets and the front-end of the curve. However, investors were quick to refocus on the reality that markets are now pricing in a year-end Fed funds rate of 2.8%. It’s not just inflation on the Fed’s top of mind, but also the labor supply/demand disconnect. Job openings currently sit at 11.5M, while the number of unemployed persons stands at 5.9M – that’s 1.9x vacancies for every American looking for a job. Thus, the Fed should feel comfortable raising rates to at least neutral rather quickly so supply/demand disconnect becomes more balanced next. As the Fed looks to land the plane smoothly, investors should focus on protecting gains, while also adding portfolio ballast that could cushion against elevated volatility. We believe high-quality, defensive exposures in sectors like technology and healthcare are best placed to navigate the dual challenges of slowing economic momentum and higher inflation.

Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s, Bloomberg

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