Market Update: July 11, 2022

Alex Ralicki |

The first six months of 2022 brought a significant correction for stock owners. Indeed, the U.S. stock market recorded its worst first-half performance in more than a half-century, as worries about inflation and a more-restrictive Federal Reserve took much enthusiasm from the bulls of 2021. Bonds did very poorly as well, the result of inflation and interest-rate fears.

The second half of the year begins with many questions still unanswered. The biggest is whether inflation will begin to show some signs of easing. The May Personal Consumption Expenditures (PCE) price index rising a notable 6.3% year over year did not quell such concerns. The June readings on producer and consumer prices, two data points expected to be closely monitored by the Fed ahead of this month’s monetary policy decision, were to be released shortly after we went to press. If inflation leads the Federal Reserve to continue aggressive “tight money” policies, chances of a recession in 2022 or 2023 will increase.

Second-quarter earnings season is at hand. In this area too, inflation is key, and the corporate reports will provide further clues to how inflation is affecting Corporate America. Judging by the recent reactions to quarterly results from Nike and FedEx, investors will likely be focused on the forward-looking views of companies, as those are likely to show how much a four-decade high in inflation is impacting how companies run their businesses. In recent months, there has been a drop in business investment spending.

Consumers are hanging in there, but recent signs suggest some stress in their spending budgets. In general, elevated prices for food and energy commodities, both of which were exacerbated by global supply-chain disruptions resulting from the war in Ukraine and COVID-19 lockdowns in China, are making it tough. The primary fallout has been less income available for spending on discretionary items. Not surprisingly, consumer discretionary stocks are feeling the wrath of Wall Street so far this year.

Conclusion: We continue to recommend investors exercise caution. Wall Street has historically not liked uncertainty and there is an abundance of that right now.