Market Update: Second-quarter 2022 recap
July 18, 2022
Inflation continued its climb to multi-decade highs during the second quarter, and the Federal Reserve’s response grew increasingly aggressive: a 25-basis-point interest-rate increase in April, a 50-basis-point increase in May, and a 75-basis-point increase in June. Estimates of the final resting place for interest rates at the end of the year were revised upward to about 3.45%.
These rate hikes will likely slow economic growth. Slowing the economy is designed to bring the high inflation rates down in the future. The trick is to raise rates high enough to bring inflation down, but not so much that it sparks a recession.
At the beginning of the quarter, market analysts put the odds of a recession at around 33%. By the end of the quarter, those odds had increased to around 52%. The anticipation of a recession caused equities to fall. Reflecting this weakness, the two-year/10-year yield curve was inverted (meaning the short-term rate exceeded the long-term rate—which historically has been viewed as an indicator of a pending recession) for much of the quarter. The Federal Reserve is expected to continue aggressively increasing short-term rates until inflation lessens.
The major U.S. stock market indexes fell into bear market territory. For the quarter, the S&P 500 lost 16.1%, the Russell 2000 dropped 17.2%, and the NASDAQ Composite gave back 22.3%. Risk-on sectors fared the worst: Consumer Discretionary and Technology stocks fell about 25.5% and 19.8%, respectively. Defensive sectors fared better: Utilities and Consumer Staples fell only 5.1% and 4.2%, respectively. The markets also experienced bear market rallies at the end of May and June, making market timing more difficult for tactical traders...
