Little is changing week-to-week regarding inflationary and recessionary outlooks. Pricing levels across many commodities have softened, slightly easing inflation concerns. The Russo-Ukraine war continues to carry on as Russia begins to use its agricultural power as leverage in negotiations and sanctions. China continues its Zero-COVID policy with city-wide lockdowns, quarantines, and testing. Remember, times like these pose significant opportunity for long-term investors regardless of short-term tumult.

Markets (as of July 1^st, 2022; change YTD)

Global Economy
Due to lockdowns across China, economists expect the country to fail to meet its 5.5% GDP growth goal. There is, however, a potential silver lining to this: slowed global inflation.

Russia’s control over agricultural exports is being utilized as leverage towards easing sanctions and in cease-fire negotiations.

Policy and Politics
The Biden administration is blocking new oil-drilling permits within the Atlantic and Pacific, while also allowing for very limited permits in the Gulf of Mexico and Alaska in an attempt to reduce reliance on foreign oil. Jeff Bezos also criticized White House pressures for gas stations to lower prices, calling it a “misdirection” and “deep misunderstanding” of market forces.

The Biden administration is considering a move to lower mortgage rates for first-time home buyers in lower income brackets as the median home price in the US ticks over $400,000 for the first time. However, experts are weary of these plans as they don’t “meaningfully address the supply-side problem.”

What to Watch

• US retail gas price figures to be released at 4:30PM EST on July 5^th. Prior figure was $4.979/gal.

• ADP Nonfarm Payroll month-over-month figures to be released at 8:15AM EST on July 7^th.

In a reversal of fortunes for investors, the markets, both stock and bond, came roaring back last week with Dow Jones Industrial Average moving higher by +5.3%, the S&P 500 Index moving +6.7% higher and the NASDAQ surging +9.0%. Further, bonds, which have suffered their worst year-to-date start ever, moved higher in price for the week. The yield of the 10-Year U.S. Treasury bond dropped to 3.13% on Friday, down from a recent high on June 14 of 3.48%. These moves were precipitated by comments from Fed Chairman Jay Powell about the continued fight to quell inflation and some major commodity prices such as oil and copper falling during the week.  

Markets (as of EOD 6/24/22; change YTD) 

Global Economy 
Globally, markets rallied as investors concluded that Central Banks around the world would not need to be as aggressive as originally expected in raising rates but could temper their plans as inflationary pressures have already started to abate. Germany, which had been crimped by energy shortages due to Ukraine/Russia war sanctions, moved to “Alarm Stage” allowing emergency plans for energy production and procurement. This would allow, for example, the opening of previously closed coal plants. As a result, crude oil prices continue to fall. (See Chart 1 below from Koyfin). Russia is widely expected to default on their bonds this week, adding one more negative implication resulting from their attack on Ukraine. 

Chart 1: West Texas Intermediate (WTI) Oil Price at $108/barrel down from $120/barrel 

Policy and Politics 

Powell spent two days testifying to the U.S. House of Representatives and the U.S. Senate. When pressed, he confirmed that the Fed is committed to combat inflation and is confident their actions are already having an impact. Further, Powell pointed to their own projections that show continued Gross Domestic Product (GDP) growth rather than a recession, for which several Wall Street prognosticators are calling. See Chart 2 below from Bloomberg & the Federal Open Market Committee (FMOC) showing Fed projections for GDP out through 2024. Historically, weakness in the labor market proceeded a recession and we are far from labor weakness in the U.S. In fact, all typical labor indicators: the unemployment rate, job openings vs available workers, and the labor force participation rate are all solidly strong; thereby in our opinion, weakening the argument for an upcoming recession. 

Chart 2 

What to Watch 
We have a big week ahead for economic indicators including the Fed’s preferred measure of inflation U.S. Core PCE (Personal Consumption Expenditures) on Thursday, June 30. Further, watch for housing related data on Tuesday, June 28 with the Case-Shiller Home Price Index.  

It is important to take a long-term perspective on investing. A recent chart by LPL Research and FactSet helped cement our opinions. 2022 has been a horrible start to the year for both the stock and bond markets with double-digit negative returns in both the S&P 500 Index (-17.3%) and the Bloomberg U.S. Aggregate Bond Index (-10.7%). However, history has shown us the benefit of waiting it out and staying invested. See Chart 3 below showing that every time since 1928 (almost 100 years) when the S&P 500 Index was down at least -15% in the first half of the year, returns were positive in the final six months, with an average of +24%. 2020 was the most recent year.  We leave you with that timely and prescient thought and to invite you to reach out to your advisor at Valley National Financial Advisors at any time.