Commonwealth

My colleague Sam Millette, manager, fixed income on Commonwealth’s Investment Management and Research team, has helped me put together this month’s Economic Risk Factor Update. Thanks for the assist, Sam!

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June was a terrible month for the markets, capping off a disappointing second quarter. The S&P 500 lost 8.25 percent during the month and 16.1 percent for the quarter; the Dow Jones Industrial Average lost 6.56 percent during the month and ended the quarter down 10.78 percent; and the Nasdaq Composite lost 8.65 percent in June and 22.28 percent for the quarter. The Nasdaq Composite also saw the largest monthly and quarterly declines due to its heavier weighting on beaten-down technology stocks.

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As we move into the second half of 2022, there are lots of things to worry about. Covid-19 is still spreading, here in the U.S. and worldwide. Inflation is close to 40-year highs, with the Fed tightening monetary policy to fight it. The war in Ukraine continues, threatening to turn into a long-term frozen conflict. And here in the U.S., the midterm elections loom. Looking at the headlines, you might expect the economy to be in rough shape.

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There were several important economic data releases last week, with a focus on business spending, consumer and manufacturer confidence, and the May personal income and spending reports. Personal spending growth came in below expectations during the month, echoing a similar decline in retail sales growth in May. This will be another busy week of updates, with a focus on service sector confidence, the minutes from the Fed’s June meeting, and the June employment report.

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June was a terrible month, with stock markets in the U.S. and abroad down substantially and developed international markets hit the hardest. The underlying reason? The Fed. With inflation high, the Fed has raised interest rates over the past six months, which has driven the risks of a recession. Still, the economic news is healthy. Companies are hiring, supporting spending growth, and business investment is sound.

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We’ve received numerous questions about our inflation outlook over the past few weeks. In some cases, it seems investors are beginning to throw in the towel on traditional asset classes in favor of more inflation-sensitive areas like commodities, real assets, and managed futures, which have had a good run as of late. Before making wholesale changes to portfolios, though, it’s important to understand where inflation may be headed, as opposed to where it’s been.

Headlines are telling us that the Fed let things get out of control, with inflation at its highest level in 40 years and stagflation right around the corner. I would argue that the consensus on inflation could be wrong, mostly because the numbers are suggesting that things have already peaked and will probably moderate as the year progresses. So, let’s have a look at the data and cut through the headlines.

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