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Market Commentary | June 16, 2022

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The Fed commits

Any question of the Fed’s resolve to fight inflation can be put to rest for the time being. Yesterday, the Federal Reserve Board hiked the Fed Funds rate by 75 basis points (bps), something that hadn’t been done in a single meeting since 1994. The upper end of the targeted range now stands at 1.75%, and officials were unanimous in the belief that rates will increase to at least 3% by year end. The rather rapid shift from what had been an anticipated 50 bps hike to the agreed upon 75 bps came thanks to the inflation print this past Friday; the Consumer Price Index (CPI) for May came in at 8.6%, above the estimate of 8.3%, hitting a 40-year high. The more aggressive stance was sufficient to put downward pressure on the 5-year inflation breakeven rate.

But while consumers may appreciate the Fed’s actions, stock markets have responded rather unkindly after an initial short lived relief rally. Seemingly market participants were initially cheered by the Fed’s courage (?), but after thinking about it overnight, they came to the realization that growth just might be hampered by such efforts, shocking, I know. Separately, but germane to that discussion, the Atlanta Fed’s GDPNow forecast for the second quarter has fallen to 0%.

You would think that slowing growth and rising costs would cause analysts to be reducing earnings estimates and margin expectations, but you’d be wrong. Such forces have yet to make an impact on the sell side community, which continues to believe that margins will not only remain high, but will increase in the second half of the year; a belief that defies all logic.

At the midway point for the month, every asset class that we model or track is in the red, save for Chinese equities; the MSCI China Index is up 3% month-to-date. Managed futures funds, which have the ability to go long or short stocks, bonds, commodities, and currencies are also faring well. Mutual funds that we utilize in the category are up from between 3.2% to 11.6% for the month. But beyond those two bright spots, the investment landscape is quite grim (and that’s before today’s broad selloff). REITs have been hit the hardest, losing 9.4%, followed by international developed stocks, which have fallen by 8.7% in dollar terms (the dollar’s strength contributed about 335 bps to that decline), and U.S. large caps, off by 8.2%. The best performing broad equity category, thanks to China, is emerging markets, which is “only” down 5.2%. The Bloomberg U.S. Aggregate Bond Index is also down 3.1%, failing once again to provide ballast to equity-heavy portfolios. The “sell everything” market persists for now, but based on today’s action, perhaps we’re getting close to capitulation, a necessary condition to start anew.

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ASSET CLASS INDEX INDEX DESCRIPTION
U.S. Large Cap Equity S&P 500 Represents US large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ
International Developed Equity MSCI EAFE An equity index which captures large and mid cap representation across 21 Developed Markets countries around the world, excluding the U.S. and Canada.
Chinese Equity MSCI China Captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips.
Emerging Market Equity MSCI Emerging Markets An Index that captures large and mid cap representation across 27 Emerging Markets (EM) countries
REITS FTSE NAREIT Equity REIT A free-float adjusted, market capitalization-weighted index of U.S. equity REITs.
Investment Grade Bonds Bloomberg U.S. Aggregate Bond Measures the performance of the U.S. investment grade bonds market. The securities must have at least one year remaining to maturity, must be denominated in U.S. dollars and must be fixed rate, nonconvertible and taxable.

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Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.

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