The Monthly Mosaic | June 2022

So far in June, we've had some economic data surprises, what a lot of commentators and even ourselves included, believed that we were likely to pass peak inflation, we had eight and a half percent a couple months ago, recent CPI number actually increased 1% month over month, a very big jump actually took inflation up to 8.6%. Year over year, core inflation actually did drop a little bit. But again, that headline number moving up was a surprise. The next surprise that came along with that was largely expected for the Federal Reserve to raise interest rates only 50 basis points, that hotter inflation number really drove them to to increase 75 basis points. And all of that has been a shock to the markets, we've seen a little bit more volatility, even then what has been typical here in 2022, so far.

What are the implications of a more aggressive Fed?

Most of the last year, there's been a big belief that the Federal Reserve has been behind the curve, and they've been slow to raise interest rates, likely they have been gotten behind the curve, this last meeting, they actually did acknowledge that they were behind the curve, not so much vocally, but really in their actions by raising an extra quarter point. 75 basis point increase in the Fed funds rate, hadn't seen that in the last 28 years, you have to go back to 1994. So again, the market had been demanding more action from the Fed in terms of getting quicker and really attacking the inflation problem. Kind of a flipside that we've been dealing with that in the equity market, the volatility we're seeing is that now there's a bigger concern that with that bigger rise, are there going to be more large increases, what does that mean for potential recession? So we've seen equity markets react quite negatively to that increase in inflation, along with the potential economic data slowing, and maybe we would be heading into a recession.

How widespread is the market volatility?

Largely throughout 2022, so far it's been there isn't the market that were most impacted in the equity markets or been the larger growth stocks, things that had some type of a story tied to duration, and they do more poorly when interest rates rise. So there really wasn't really a whole lot of recession, risk or kind of fears of economic slowdown in the equity market. More recently, we've seen that broaden out a little bit where most of the sectors are declining, even the energy sector hasn't done as well as it had previously. So we've definitely moved from the beginning of the year where all the fears were more interest rates are moving up, that's going to be difficult for the economy to now we've raised interest rates a couple of times, again, a very large increase here recently. And that's providing more of a concern of are we doing too much? What are the risks of recession, first quarter GDP was negative. After the retail sales number we received here more recently, that was disappointing. The Atlanta Fed GDP now cast has moved also to 0.0% for the second quarter. So we are on the verge of teetering on what could be a technical recession, I think the equity markets are really looking to that. And that's where you see the increased downside, and really all sectors here more recently.

Looking forward: what to expect

So this year has been incredibly volatile. And we definitely anticipate that this volatility is going to remain with us while these inflation numbers continue to come in, they're going to be heavily scrutinized, we're gonna need some type of concrete signals that inflation is easing, and that we do believe will help kind of start to put take a little bit more of the volatility out of the marketplace. But we definitely think that, you know, there's our opportunities that are opening given the sizable declines both in fixed income and equities. Right now, when we're looking at it, we're seeing probably more near term opportunities on the fixed income side, the equity side, there's still a little bit more to be, to be determined in terms of how the economy develops. So we're cautioning investors right now. You still want to be looking at safety in the near term, with an eye for opportunities that are developing, but we do anticipate that volatility is likely going to remain throughout the summer. And then as we get into the fall, maybe we'll see some better signs that inflation is subsiding. And that maybe the Federal Reserve does not have to continue to raise interest rates to the degree that they have so far.

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