Weekly Market Update 5/16/2022
The Federal Reserve raised the benchmark short-term interest rate by one-half a percent (“50 basis points”) at this month’s Federal Open Market Committee (FOMC) meeting. It was the first half-percentage-point hike in 22 years, and another sign that the central bank is playing catch up in its attempt to combat inflation. Although Federal Reserve Chairman Jerome Powell ruled out a 75-basis-point increase this year, the door was left open for two more half-point hikes at the June and July FOMC meetings.
The central bank also laid out the timeline for reducing its nearly $9 trillion balance sheet. Beginning June 1st, the Fed will conduct monthly asset sales of $47.5 billion ($30 billion of Treasury securities and $17.5 billion of mortgages) through August, and then ramp up the bond-selling pace (to $95 billion a month) this fall if the economy and labor market cooperate.
April’s employment report made for solid reading again. Specifically, nonfarm payrolls increased by 428,000 positions last month, bringing the total to an estimated 2.074 million jobs created through the first four months of this year. The unemployment rate remained steady at a pandemic-era low of 3.6%.
The labor report, though encouraging, brought more concerns for Wall Street. Over the past 12 months, average hourly earnings increased by a stronger-than-anticipated 5.5%. The wage gains, coupled with a slight decline in the level of labor participation (to 62.2%), which worsens shortages of workers, adds to inflation.
Treasury market rates are on the rise. The yield on the 10-year Treasury note, which is a stand-in for the direction of home-mortgage interest, recently climbed above 3.00%. The higher cost of borrowing and the impact it may have on homebuilding, business investment, and consumer spending has unnerved investors. On point, the jump in the 30-year fixed-rate mortgage, to above 5.00%, has led to a decline in mortgage applications during the all-important spring home buying season and a drying up of the refinancing market.
Conclusion: The worst thing an investor can do in this highly volatile environment is panic sell. We think maintaining a well-diversified portfolio of high-quality companies with strong balance sheets and ample cash flows may be the best way to minimize further possible downside risk.