The 2nd quarter of 2022 saw a decidedly negative equity market, rising bond yields, and, at times, extreme volatility, continuing the trend that began early in 2022. The first half of the year has been one of the worst in the history of financial assets. The bond market, although expecting rate increases, has nevertheless been caught off guard; market expectations for Fed Funds rate hikes have risen dramatically since early in the year. On June 30th, the S&P 500 Index was down 21% year-to-date, investment grade corporate bonds down 14%, and 10-year bond yields were up 1.2%.
In a sense, June 10th summed up the market’s worries: CPI hit a 40-year high at 8.6% and core prices were up 6.0%. Energy prices were up 35%, grocery items 12%, and shelter costs 5.5% (all year-over-year). Services prices have been rising as well. Inflation-adjusted hourly earnings dropped 3% year over year, a trend now going back some 14 months. Although consumer spending has held up and consumer balance sheets remain strong, the University of Michigan sentiment model hit a record low. By mid-month, the markets were melting down. The Fed raised the fed funds rate by an unusually high 75 bps. The 10-year U.S. Treasury note yield touched 3.50% before rallying down to 2.90% on recession fears.
The question on the top of the market’s collective mind: Can the Federal Reserve Board engineer a soft landing?