Bear Market: Outlook - June 2022
The Fed, Inflation and the Bear Market
May was a very volatile month, despite the fact that the markets ended nearly unchanged at the end of the month. The S&P 500 briefly dropped into bear market (bear market), while the Nasdaq plunged deep into a bear, falling below 30% before recovering.
At the end of the month, and breaking a consecutive weekly streak of 7, the major indices had a solid positive performance. However, it is too early to say whether it is simply a rebound of the bear market.
The Fed has offered some clearer expectations of 50 bp rate hikes in the next 2-3 months and raised rates in May. However, higher inflation and weaker economic data will dictate future action.
For now, prudence remains the name of the game. Rebounds should be used to rebalance losing positions into more defensive portfolio allocations.
Macro Corner
The markets staged a powerful rally during the last week of the month; that came as the Memorial Day weekend approached. The market reversed what had been a long streak of consecutive losing weeks. The Nasdaq fell deep into the territory of bear market during the month; the former fell more than 30%, while the S&P fell below the 20% intraday barrier.
However, we mentioned the last month that "we are likely to see rebounds along the way; however, everything points to an economic slowdown that may take place sooner than expected.". The end-of-month rebound may be just a rebound of the bear marketThe market had already spent 7 consecutive negative weeks, but it is too early to bottom out.
The central bank raised rates by 50 bps at the May meeting and expectations are set.
Bonds have assumed a Fed policy error as yields rose throughout the month, despite worsening economic data across the board.
All economic indicators in the US and the rest of the world point to disappointing economic growth. Recall that in April we noted that the Q1 GDP print was negative, contrary to economists' expectations. Recessions are backward-looking events, so even though the yield curve predicts recessions later in the future, we may already be in one if Q2 also has a negative print.
Fixed income instruments may benefit more from any change in Fed actions. However, it is known that rallies in the Fed's bear market are vicious and known in hindsight. Prudence remains the best course of action, in addition to focusing on industries with pricing power or the ability to pass on inflation to customers. However, even those may be difficult to pressure if we continue this route.
