Weekly Market Update, August 1, 2022

Presented by Mark Gallagher

General Market News
• The Federal Reserve (Fed) raised interest rates by another 75 basis points (bps) at last week’s FOMC meeting, bringing its target range to 2.25 percent to 2.50 percent. Inflation remains stubbornly high and conversation among market participants is becoming increasingly focused on the timing—rather than the likelihood—of a potential recession. Some believe the U.S. may already be in a recession after seeing two quarters of economic contraction as measured by gross domestic product (GDP). Others, including Fed Bank of Atlanta President Raphael Bostic, maintain hope that such a development can still be avoided if the job market remains robust. “I don’t think the country is in a recession,” Mr. Bostic said on NPR. “One of the things that I’ve been encouraged by is actually how strong the job growth has been, which suggests to me there’s a lot of momentum in the economy.” He added, “There’s a lot of demand out there, and so I think we’re a ways away from a recession.” The U.S. Treasury yield curve saw some inversion last week. Treasury yields fell on the short to intermediate end of the curve with the 2-year, 5-year, and 10-year down 6 bps (to 3 percent), 11 bps (to 2.73 percent), and 4 bps (to 2.71 percent), respectively. The 30-year, however, was up 8 bps (to 3.06 percent).
• Equity markets rallied last week, supported by seemingly dovish Fed speak from FOMC Chairman Jerome Powell and better-than-expected second-quarter earnings reports from Apple (AAPL) and Amazon (AMZN). In recent months, we’ve heard from companies such as Micron (MU), Qualcomm (QCOM), and Apple about the impact of lockdowns in China on sales and parts availability. In April, Apple said it expected a $4 billion–$8 billion revenue hit during the second quarter. The hit was smaller than expected, with the company beating revenue and gaining 3 percent in iPhone revenue growth year-over-year. Amazon’s earnings were bolstered by better-than-expected performance from its cloud and advertising segments. Cost cuts on the fulfillment side also showed the company’s ability to adapt following massive e-commerce demand during the Covid-19 pandemic. While these two FAANG names helped ease broader growth, the biggest news last week was the 75 bps rate hike at the July meeting. Powell highlighted the need for the Fed to remain data dependent during the post-meeting press conference, which was seen as an easing from prior discussion about crushing inflation. This commentary led market participants to believe we may be close to the end of a Fed rate hike cycle, with the bond market pricing in cuts to the federal funds rate in March of 2023.
• On Wednesday, the FOMC rate decision from the Fed’s July meeting was released. The Fed hiked the upper limit for the federal funds rate by 75 bps, raising the target from 1.75 percent to 2.5 percent. This action, the central bank’s second consecutive 75 bps hike, designed to slow the pace of the economy and combat inflation, was widely expected by markets and economists. Looking ahead, the Fed is expected to continue to tighten monetary policy throughout the year; however, the pace of future rate hikes will be highly dependent on July and August inflation and jobs reports.
• On Thursday, the advance estimate for annualized second-quarter GDP growth was released. The report showed that the economy contracted at an annualized rate of 0.9 percent, which was worse than the consensus 0.4 percent increase that was expected. This marks two consecutive quarters with economic contraction, though this slowdown in growth is not expected to slow the Fed’s tightening plans, given still-high levels of inflation throughout the economy. Personal consumption continued to show modest growth during the quarter, with consumption up 1 percent on an annualized basis against forecasts for a 1.2 percent increase.

Equity Index Week-to-Date Month-to-Date Year-to-Date 12-Month
S&P 500 4.28% 9.22% –12.58% –4.64%
Nasdaq Composite 4.72% 12.39% –20.47% –14.95%
DJIA 2.97% 6.82% –8.60% –4.14%
MSCI EAFE 2.11% 4.98% –15.56% –14.32%
MSCI Emerging Markets 0.41% –0.25% –17.83% –20.09%
Russell 2000 4.35% 10.44% –15.43% –14.29%

Source: Bloomberg, as of July 29, 2022

Fixed Income Index Month-to-Date Year-to-Date 12-Month
U.S. Broad Market 2.44% –8.16% –9.12%
U.S. Treasury 1.59% –7.69% –8.69%
U.S. Mortgages 3.21% –5.85% –6.69%
Municipal Bond 2.64% –6.58% –6.93%

Source: Morningstar Direct, as of July 29, 2022

What to Look Forward To
On Friday, the July employment report is set to be released. Economists expect to see that 250,000 jobs were added, far fewer than the 372,000 that were added in June but still strong on a historical basis. The unemployment rate is expected to remain unchanged at 3.6 percent for the fifth consecutive month, which would tie the post-pandemic low. If estimates hold, this report would signal continued solid growth for the labor market, which, in turn, could help support the Fed’s efforts to tighten monetary policy to rein in inflation in the months ahead.

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million. One basis point is equal to 1/100th of 1 percent, or 0.01 percent.

Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave. Suite #304, North Saint Paul, MN 55109. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 651-774-8759 or at mark@markgallagher.com

Authored by the Investment Research team at Commonwealth Financial Network.

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