July market update: Indexes retreat on Fed rate hike
A highlight of the summer for most Americans is taking a day to celebrate the 4th of July. Fireworks, parties, and breaking hotdog[i] eating records marked this year’s celebrations. Turning from celebrations, the second quarter is now in the books in what has been a challenging year thus far. June featured weakness in major U.S. market indexes, lower government bond prices (pushing yields higher), and price dips in many major commodities.
For the month of June on the equities side, the S&P 500 declined by 8.39%[ii], the Nasdaq 100 shed 9.00%[iii], and the Dow Jones Industrial Average decreased by 6.71%[iv] (Numbers accurate as of July 1st. May incorporate current trading session).
The markets send signals, and we’re tasked with digesting them. Looking across equities, commodities, currencies, and bonds, it seems that markets are signaling a potential slowdown or recession, at least based on the first half of 2022.
Fortunately, even with a pessimistic consumer, wage growth has been solid and payrolls remain strong, with unemployment still low.
Interest Rate Predictions
The Federal Reserve is battling inflation via rate hikes, and there are signs that it could be working. At the June meeting, the Fed increased the overnight lending rate by 0.75%, the largest hike since 1994[vi]. The recent increase places Fed funds at 1.50% to 1.75%.
Looking ahead, the Fed’s dot-plot shows that it sees the overnight Federal Funds lending rate at 3.4% at the end of 2022 and 3.8% in 2023[vii], and some analysts are actually calling for rate cuts in 2023. Future rate cuts would make sense once inflation is under control and out of the way–and if we were in a recessionary or slowing environment.
While it is a little early for a long-term crystal ball here, we seem to be near an inflection point of sorts. If inflation is under control or close to it, what’s next? The tea leaves so far seem to be signaling a slowdown, but we will keep watching. It may still be true that the best hedge against inflation is patience[viii].
Housing remains strong, with an inventory shortage continuing at about half of pre-COVID levels. The inventory shortage could ease, however, with June inventory 19% higher[ix] than the year prior and the median listing price hitting a fresh record high of $450,000.
The big picture for housing remains solid overall, and the current landscape is much different than in 2008, as the vast majority of American mortgages are presently fixed-rate mortgages. In 2006-07, there was a much higher number of adjustable-rate mortgages[x], many of which were of the subprime variety.
Consequently, if a housing slowdown were to occur–perhaps due to a consumer stretched by costs of goods, higher average housing payments, and higher mortgage interest rates–it’s likely foreclosures and forced sales would be minimal in comparison to 2007.
However, a topic of interest going forward will be the percentage of new mortgages that are ARMs[xi]. Demand for adjustable-rate mortgages has increased recently, as price-sensitive borrowers try to lower their monthly expenses via these products. Of course, higher interest rates in the future could ultimately affect these borrowers adversely when their mortgage interest rate adjusts in the future.
June featured a tone of anticipation leading up to the Fed’s historic rate hike. Now that a 0.75% rate hike is in the books for June, attention turns to the July Fed meeting. At the time of writing, markets show an 85.6% probability[xii] for another 0.75% rate hike in July[xiii]. We still have a few weeks to go, so things could change between now and the July Fed meeting.
As time passes, we will be able to get a better picture of rate hikes’ impact on inflation. We’ve seen commodities prices a bit softer[xiv] over the last month, with notable declines in copper[xv] pricing. We’ll see how things shape up in July. This month, market participants will also be keeping tabs on unemployment numbers, set to be released in early July. Though unemployment was a steady 3.6% at last read, higher interest rates have historically correlated to higher unemployment.
With that said, if there is anything on your mind regarding your investments or overall strategy, please feel free to contact Emerald, we are always here when you need us.
Disclosure: Emerald Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
[i] Puga, F. (2022, July 4). msn.com. Nathan’s Hot Dog Eating Contest: How many hot dogs did the 2022 winners eat? [Online] Available at: Nathan’s Hot Dog Eating Contest: How many hot dogs did the 2022 winners eat? (msn.com)
[iv] (2022, June-July). Investing.com. Dow Jones Industrial Average (DJI). [Online] Available at: Dow Jones Industrial Average Historical Rates (DJI) – Investing.com
[v] (2022, June). Sca.isr.umich.edu. Surveys of Consumers Marks Leadership Change. [Online] Available at: Dow Jones Industrial Average Historical Rates (DJI) – Investing.com
[vi] Rugaber, C. (2022, June 15). Apnews.com. Fed attacks inflation with its largest rate hike since 1994. [Online] Available at: Dow Jones Industrial Average Historical Rates (DJI) – Investing.com
[vii] Amaro, S. (2022, July 1). Cnbc.com. Forget rate hikes, these analysts are predicting interest rate cuts next year. [Online] Available at: Fed could cut interest rates in 2023, analysts say, after rate hikes this year (cnbc.com)
[viii] Goodkind, N. (2022, July 8). View.newsletters.cnn.com. Before the Bell. [Online] Available at: https://view.newsletters.cnn.com/messages/16572797979063a01fb3c25b5/raw?utm_term=16572797979063a01fb3c25b5&utm_source=cnn_Before+the+Bell+Friday+7%2F8&utm_medium=email&bt_ee=o2lDNwyOFmgtYiNLf2eieWj7AXslukoTadpPKRZHJyNPrb1HQNT1hSamv3CqXxBr&bt_ts=1657279797909
[ix] Olick, D. (2022, June 30). Cnbc.com. Housing shortage starts easing as listings surge in June. [Online] Available at: Housing shortage starts easing as listings surge in June (cnbc.com)
[x] Barnes, R. (2022, June 24). Investopedia.com. The Fuel That Fed the Subprime Meltdown. [Online] Available at: The Fuel That Fed the Subprime Meltdown (investopedia.com).
[xi] Olick, D. (2022, May 11). Cnbc.com. Adjustable-rate mortgage demand surges to 14-year high, as homebuyers try to afford this pricey spring market. [Online] Available at: Adjustable-rate mortgage demand surges to 14-year high, as homebuyers try to afford this pricey spring market (cnbc.com)
[xii] (2022, July 27). Cmegroup.com. CME FedWatch Tool. [Online] Available at: Countdown to FOMC: CME FedWatch Tool (cmegroup.com)
[xiii] Derby, M. (2022, June 28). wsj.com. Fed’s Williams Sees Another Large Rate Rise at July Meeting as Possible. [Online] Available at: Fed’s Williams Sees Another Large Rate Rise at July Meeting as Possible – WSJ
[xiv] Hur, K. (2022 June 29). Cnbc.com. Charts suggest the recent boom in commodities ‘is not long for the world,’ Jim Cramer says. [Online] Available at: Cramer: Charts suggest recent commodities boom will come down long term (cnbc.com)
[xv] Bossi, A., Ritchie, M., Zhu, W., & Burton, M. Bloomberg.com. Copper Slumps to 17-Month Low on Deepening Recession Concerns. [Online] Available at: Copper Prices Sink Toward $8,000 in Bleak Signal for Global Economy – Bloomberg
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