Madison Client Communication | 2Q 2022


The S&P 500 remained erratic, finishing the second quarter down 16.1%, bringing the year's total to 20.0%. With a 75 basis point increase in June and another one anticipated in July, the Federal Reserve has begun its aggressive monetary tightening to reduce inflation. By the end of the year, the Fed Funds Rate is anticipated to reach 3.38 %. Much of these anticipated movements have been priced in by the bond market, yield curve, and equities markets. Real GDP growth in the first quarter was -1.6%, although, 3% second-quarter growth is predicted, current economic activity and Fed tightening may cause it to be lower. We anticipate a modest GDP increase of around 2.4% for the entire year.

Investor preferences for bonds and away from riskier assets may change when concerns about inflation and recession shift. The chance for good returns appears to have risen because of the sharp increase in bond yields (revaluation) this year. This could encourage investor reallocation to the sector. Gasoline prices, which are highly visible and sensitive to consumer demand, reaching a peak or falling could enable the Fed to slow the pace of tightening that is now discounted in bond yields. The Fed has made it clear that its goal is to contain inflation, which may necessitate more significant rate rises than currently anticipated. Long-lasting geopolitical worries over the Russia/Ukraine war and China's zero-Covid lockdowns might make inflation pressures worse by disrupting supply chains. Higher foreign returns might push yields higher while the Fed concurrently reduces its holdings, attracting investor capital away from our Treasury market.