Weekly Market Update: June 20, 2022

Inflation has shown little sign of easing. This was evident in the Labor Department’s reports on May consumer and producer prices. The Consumer and Producer Price Indexes showed respective 12-month advances of 8.6% and 10.8%.

The “hot” inflation data are pushing the Federal Reserve to aggressively tighten the monetary reins. The central bank’s dual mandate is to foster full employment and promote stable pricing, the latter of which will be an arduous task given the surging prices. 

Borrowing costs are on the rise. In mid-June, the yield on the 10-year Treasury note topped the 3.35% mark, the highest level since 2011. Higher lending rates are starting to take a toll on economic growth. This is playing out in the housing market, with home sales recently declining. This slowdown is apt to continue with the average 30-year fixed-rate mortgage recently topping 6.00%. Of note, mortgage applications, which are a strong indicator of future home sales, fell to a 22-year low in early June.

Talk of a recession is building. Wall Street appears worried that the Fed won’t be able to successfully navigate a “soft landing” for the U.S. economy. The yield on the two-year Treasury note briefly exceeded the rate of the benchmark 10-year Treasury note. This inversion to the yield curve usually indicates a view among investors that there is a greater risk to the economy in the short run.

Conclusion: The aforementioned factors have created a lot of uncertainty about the U.S. economy and the upcoming earnings season. Wall Street has displayed its displeasure with notable selloffs in the equity, bond and crypto-currency markets. That said, we suggest those with longer-term investment horizons not panic sell, but instead use the retreat as an opportunity to build positions in oversold high-quality companies.

Source: ValueLine.com