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Higher Inflation leads to Recession Fears and a Market under Pressure in June Thumbnail

Higher Inflation leads to Recession Fears and a Market under Pressure in June

The strong market rally in the last week of May was encouraging and held through the first 5 trading days of June.  Investors were prepared for a half point increase in interest rates at the June Federal Reserve Board meeting.  The yield on the 10 Year Treasury pulled back from 3.1% set at the beginning of May to 2.74% before the Memorial Day holiday – a signal that bond investors expected inflation to level off.  It was widely anticipated that the May inflation numbers would remain at or slightly below the 8.3% set in April.  

The outlook changed dramatically on Friday, June 10 when the Department of Labor reported year over year inflation in May rose to 8.6%.  The market declined sharply on this unexpected report.  The yield on the 10 Year Treasury surged to 3.48% by June 14th as the bond market reacted to the higher inflation news.  On June 14 and 15 the Federal Reserve Board held its regular meeting and they voted to raise the short term interest rate 0.75% rather than the expected 0.50%.  By June 17th the S&P 500 Index set a new low for the year of 3,636 points amid fears of a possible recession.

In his semi-annual testimony to Congress on June 23rd Powell opened by saying, “We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so.” This was a more aggressive position than the Chairman has expressed in prior communications and following his testimony the stock market rallied.  The S&P 500 ended the month 100 points above its June 17 low, but still logged another negative month.  

The pressure from inflation and recession fears made June the worst month for the market this year.  There have been four rally attempts since the high on January 3rd and so far each has failed to hold and the S&P 500 has moved lower.   The bottom of a bear market cannot be known until it is over.  When the last sellers sell, the bottom will be set and buyers will be there to seek bargains and push prices up.  A market bottom is a process and requires patience and resolve to preserve as much capital as possible and be positioned for the eventual recovery.  

It appears that the aggressive move by the Fed in June is starting to make a positive impact.  One sign is that commodity prices are dropping.  From oil to lumber to corn and sugar, commodity prices declined significantly in June.  Also, the yield on the 10 Year Treasury declined after hitting the high on June 14th.  It closed the month at 2.97% which is an indication that the bond market expects inflation to slow.  

It is reasonable to expect a rally in the near term.  However, we are prepared for continued volatility as the market digests the probability of a recession.  The healthcare sector remains strong even as other sectors decline. Large pharmaceuticals and insurers continue to do well.  

If you would like to review your own account, please call us.  

Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our views at the time of this writing, and it is subject to change. It is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us.