Weekly Market Wrap | 1 July 2022

Worst start in 50 years

The S&P 500 fell 2% this week after a 7% rally last week. The US stock market is on track for its worst first half in more than 50 years, since the 1970s. Even investors in diversified balanced portfolios (with equity and bonds) have experienced drawdowns. Assets that were initially thought of as unaffected by the larger macroeconomic trends did not prove to be a safe refuge, with Bitcoin, the largest cryptocurrency, down more than 50%. 

Image: New York Times

The question on many investors’ minds would be how much worse can it get? We’ve looked at it historically here

Concerns shifting from inflation to growth

As we mentioned last week, the latest consumer inflation expectations came in lower than expected. A more reliable indicator of inflation expectations that the Fed watches closely is the 5 year/5 year breakevens, which captures average inflation for five years in five years’ time. This indicator has now fallen below pre-pandemic levels and closer to the Fed’s long term target inflation of 2%. 

Image: Bloomberg

Fed is still on a warpath against inflation

At a meeting with other central bankers in Portugal this week, Chair Powell said that slowing growth down for supply to catch up remains a “necessary adjustment that needs to happen”. 

We are already seeing signs that the economy is slowing down. IHS Markit, provider of financial market information, estimated Q2 2022 US GDP to grow at 0.1%, a downward revision from 2.4%. Other forecasters now say that it is possible for economic growth to even turn negative for a second consecutive quarter, marking a commonly held but unofficial definition of a recession. 

The National Bureau of Economic Research, which decides when expansions and contractions start and end, defines recessions differently, as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

Currently, most economists and policymakers going by that definition, would concur that the United States is not in a recession yet. However, more believe that a recession is likely in the next year, as the Fed taps on the brakes a bit too hard to slow down the economy and rein in inflation. 

China reopens tentatively

The Chinese equity markets, as represented by MSCI China, fell 1 % over the week, but companies in the leisure sector rose as China halved its mandatory two week hotel quarantine. 

In fact, Chinese stocks are approaching a bull market. The CSI 300, representing 300 stocks traded on Shanghai Stock Exchange and Shenzhen stock exchange, had locked in five weeks of gains and risen almost 20% since its lows in April. In contrast to other major economies grappling with inflation, China’s inflation rate is currently 2% and leaves PBoC with a lot of room for policy stimulus in order to achieve its GDP growth target of 5.5%. 

Image: Bloomberg

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