June Macroeconomic & Market Analysis

What Happened

In June, investors in public equities were rivaled with far more than they were anticipating. Inflation, interest rates, and investor sentiment went haywire without any significant guidance from the Federal Reserve and its board members.

A report in May regarding the Consumer Price Index (CPI) gave economists a shock when inflation reached 8.6%. The main components of the index that generated the most significant growth was energy which rose 34.5%, followed by food at 10.1%. Other items in the index related to services also accelerated to 5.7%, demonstrating the continued rising costs in every corner of the United States economy.

On June 15, 2022, as inflation continued to swipe buyer power away from the pockets of consumers, the Federal Reserve raised interest rates to 1.75%. This was a 75-basis point jump compared to the month prior. Such a sudden climb in the federal funds rate demonstrates the urgency by the Federal Reserve to lower inflation and return purchasing power to consumers. However, these shifts can cause further volatility in the stock market, which could lead to further downside if the central bank continues to be “hawkish”. A more “dovish” approach is certainly not in the picture as the current direction of the board is to tighten monetary policy.

Gross Domestic Product (GDP), the indicator that measures the value of finalized goods and services in the United States, experienced a decline of 1.6% in the first quarter of the year on an annualized basis. This comes after consistent efforts to lower inflation. However, it appears that the Federal Reserve acted too slowly in terms of preserving short-term growth in the U.S. economy. This metric shocked many investors in the public markets and caused a substantial shift in the major market indexes.

Market Turmoil

The broad market faced incredible volatility throughout the month of June, leading to a decline of 8.39%. That brought the entire index into a bear market, a term coined to recognize when market sentiment is overly negative and when the index declines 20% from all-time highs. Since the 52-week low of 3,636.87, the index has rebounded slightly as investor sentiment turns less bearish, but still wary of the possible upcoming economic hurdles ahead.

Despite the S&P 500 index declining past the 20% barrier during June, many technology-focused companies experienced much more severe declines on their share price throughout the year. Apple, the largest publicly-traded company in the world, had shares fall nearly 25% by the end of the month. Since then, shares have rebounded slightly towards the early-June price range.

While large-cap stocks were plummeting, oil prices seemed to follow. After pushing past $120 per barrel in early June, WTI Crude fell to around $105 by the month's end. This represented an almost 15% decline in the span of only three weeks. Sudden downwards pressure on oil could also lower the cost of fuel at the pump for consumers. As a result, consumer discretionary spending could rise as less capital is spent on fuel in the short-term.

Upcoming Events

Another report on the Consumer Price Index is expected to be released on July 13. If inflation surprises to the upside and doesn’t fall from its nearly 40-year high of 8.6%, then investor sentiment could continue to worsen. Alternatively, if inflation falls below 8.6%, investor optimism could return substantially.

Additionally, the GDP report for the second quarter is expected to be released later this year on September 30. Although, estimates will be made in advance on July 28 regarding second quarter GDP results. If second quarter GDP results turn negative, that would signify to economists that a recession has occurred. By definition, a recession occurs after two consecutive quarters of negative GDP growth. The severity can vary and depend on unemployment, inflation, and interest rates in the economy. Such mild recessions can also be short-lived and pave a clearer path forward to uplift the economy in the future.

Another short-term indicator to look out for in the coming months is the unemployment rate. Currently, unemployment stands at only 3.6% in the U.S. but could change as external market forces shrink earnings. However, some sectors, such as technology, have begun to lay off employees to return existing profits back to their shareholders. Technology is typically one of the first sectors to scale back at the early signs of a weakening economy. It is important for investors and economists to see if this persists throughout the rest of the year in more stable sectors as well.

Short-term Outlook

As of now, central banks around the world are bracing for what feels like an inevitable recession to investors. Preparation began with strict interest rate hikes in the hopes to cool consumer spending to alleviate rapidly accelerating inflation. This has resulted in layoffs beginning in the technology sector. Though not substantial yet, it could continue as the era of “cheap capital” has ended.

Supply chain issues, which have been the root cause to many consumer-oriented items skyrocketing in price, could continue to worsen if not more appropriately addressed. The Federal Reserve doesn’t hold any influence over the supply-side of these chains but can alter demand accordingly to alleviate some costs in the meantime.

As the Federal Reserve plans to continue raising interest rates throughout the year, investors should expect an average interest rate of 3.4% according to policymakers. This would imply that more pressure could be placed onto investors in the public markets as risk-off assets, such as bonds, become more favorable in the short-term. Ironically, it’s been historically beneficial to do the opposite and instead favor equities in times of uncertainty, particularly when the broad market is trading at a discount relative to all-time high prices.

Summary

The economic data provided in June, and more yet to come, provided economists with critical details regarding the U.S. economy. If these metrics continue to worsen, there could be serious cause for concern.

However, it should be noted that this recession, assuming two consecutive quarters of GDP turn negative, could be mild and simply viewed as a bump in the road. If so, this could pave a more optimistic future for investors and consumers who have experienced tremendous hurdles in the public markets and faced the surging costs of goods and services.