Weekly Market Update: August 1, 2022
Wall Street has so far taken second-quarter earnings season in stride. That does not imply that quarterly results have been great or even satisfactory in some instances. The news, though, has probably not been as bad as feared. And the positive surprises have occasionally even brought investors back into some recently out-of-favor equities (e.g. Netflix).
The Federal Reserve remains aggressive on the monetary policy tightening front. It was announced late last week, after the latest Federal Open Market Committee (FOMO), that the benchmark short-term interest rate would raise another 0.75%.
More-restrictive monetary policies are starting to produce the slowdown in demand the Fed was hoping for in its battle to drive prices lower. Investors need not look any further than the cooling of the housing market. There, elevated financing costs, fueled by the aggressive rate-hike environment, and a limited supply of available homes, have made buying a home less affordable. Mortgage rates recently surged to a level not seen since late 2008.
Hopes of a more-hawkish Federal Reserve orchestrating a “soft landing” for the U.S. economy are fading. The inverted Treasury yield curve, which occurs when the rates on short-term notes exceed those of longer-duration government debt, may be an indication that the economy is heading toward a recession. A period of stagflation, where slowing growth occurs at the same time inflation is high and unemployment is rising, can’t be ruled out either. The recent uptick in initial weekly unemployment claims (to an eight-month high) and more companies, including technology behemoth Apple, announcing workforce reductions may be signs of some emerging weakness in the labor market.
Conclusion: We don’t think this is the time to throw caution to the wind. There is still a lot of uncertainty for investors, including geopolitical concerns overseas and the impact of the Federal Reserve aggressively tightening the monetary reins into a period of slowing economic growth.