Happy Fourth of July – Weekly Market & Economic Update – 7/5/22

I hope you had a good Fourth of July. Yesterday I celebrated a narrative that is hopeful, not a truth that is oppressive.

The tumultuous nature of this year’s patriotic celebration has been difficult to watch on many social channels. And, personally, difficult to celebrate – not in the sense of being anti-patriotic, but rather, being fiercely drawn to the qualities and freedoms the American narrative has stood for since its inception. Yet the truth – which should not be denied – is that our country has a rich history of genocide, oppression and, most certainly, selective memory when it comes to its narrative of ‘liberty and freedom for all’. As well as the irony of its present acts, and proclamations, of “my body my choice”, sovereignty, and freedom.

Our narrative stands for hope. Not Truth. It stands for what we strive to be, to achieve and, embody. And that is what I chose to recognize and celebrate this Fourth of July – as I hope you did as well. A moment whereby we celebrate a narrative which has greatly allowed us to effect change, challenge oppression, bigotry and hatred. And one day, hopefully, align the truth of our actions fully with those values.

Who and what we choose to vote for is not a charade of trivialities but a compounding of legislation and constitutional transmutation effecting each of our inherent rights as human beings. The same goes for the way we choose to spend and invest our money. Every moment we exist in this society we get to choose the kind of world we want to live in through our participation and every day actions. We get to choose how we respond to divisiveness and hatred. We get to do our individual part – however small it may be – as a piece of a whole and we should not take that responsibility lightly nor should we do so quietly.

And with that, I digress. Below is your Weekly Market & Economic Update by the numbers. I’ll leave you with a quote by Lawrence Ferlinghetti.

Warmly,

Mark Sauer
info@AllOneWealth.com
+1(310)355-8286

Market Update

• Global Equities:  Markets slipped following the previous week’s bounce, as investors continue to lose faith in the Fed’s ability to engineer a soft landing and avert recession. The Nasdaq Composite was once again the worst performing index, losing -4.1% during the week while the S&P 500 declined -2.2% and the Dow Jones Industrial Average lost -1.3%. Developed International stocks fell -1.8% while Emerging Markets were down –2.0%.
• Fixed Income: 10-Year Treasury yields dipped back below 3%, hitting 2.9% as recession fears gripped the bond market. High yield bond prices also reflected elevated recession risks, with the option-adjusted-spread on the Bank of America US High Yield Master II Index hitting its highest level since 2020. High yield bond mutual funds and ETFs reported $1.6 billion in outflows during the weekly period ended June 29th.
• Commodities: Oil prices bounced around but ended relatively unchanged at $108.40. The US oil and gas rig count declined for a second week in a row, with oil and gas drillers taking 3 rigs out of production, despite continued pleas from lawmakers to increase domestic output.

Economic Update

• Recession Already Here? The Atlanta Fed’s GDPNow gauge of economic activity shows US second-quarter output contracting by –2.1%, which, coupled with the Q1 reading of –1.6%, fits the technical definition of a recession. Weakness in consumer spending and inflation-adjusted domestic investment have triggered a sharp decline in the measure. While GDPNow is not the official recession indicator, the model registered zero tracking error from its inception in 2011 through 2019, before the pandemic triggered an unprecedentedly rapid recession in 2020.
• Has Inflation Leveled Off? The Federal Reserve measures inflation by the Core Personal Consumption Expenditures (PCE) Index, which quantifies price increases excluding food and energy. The most recent reading shows a month-on-month increase of 0.3% and a year-on-year increase of 4.7%, both of which were slightly below expectations. The annual rate of inflation, while still rising, has levelled off a bit and declined for the third month in a row, which may prompt the Fed to adopt a slightly less aggressive stance with pending interest rate hikes. The market still anticipates a 75-basis point hike at the July 27th meeting, with odds of a lesser, 50 basis point increase at just 17% – per CME Group.
• Manufacturing Slump: US manufacturing activity is not yet supporting the narrative of a severe recession, although the data did soften in June, with the ISM Manufacturing Index weakening from 56.1 to 53, weaker than the expected 54.9 reading. US manufacturing continues to struggle with supply chain issues despite persistently strong consumer demand.

Chart of the Week

The Chart of the Week shows the effective yield of the Bank of America US High Yield Bond Index, the benchmark for US “junk” bonds. If we exclude the Covid-19 pandemic spike, the yield on the index has risen to its highest level since 2016, as investors have begun to price in a much higher likelihood of default should the US officially enter a recession. Since the 2008 Financial Crisis, the Fed has been effectively backstopping the high yield bond market by keeping Treasury yields low and forcing yield-seeking investors into riskier debt. During the Covid selloff, the Fed went even further and bought high yield bonds directly. Those policies are off the table with the Fed selling its bond holdings, therefore investors are demanding higher yield premiums as compensation for the added risk.