Markets “In a Nutshell” for May 31, 2022
Investment Week at a Glance
Stocks finished higher for the week. The Dow Jones Industrial Average rose 6.20%, the S&P 500 was up 6.60%, and the NASDAQ rose 6.80%. Foreign stocks (MSCI EAFE) were up, rising 0.20%. Bond prices were up for the week, with the 10-year U.S. Treasury ending the week at 2.74%. (Data source: Wall Street Journal)
Equities Bounce Back Strong
After seven straight weeks of declines for the market, equities were able to bounce back with gains of over 6% for all the major domestic indexes. Some believe this market bounce was due to a recession being too priced into the market. Although many are still worried about inflation, the consumer continues to be strong and is willing to pay these elevated prices we are currently seeing. While this may eventually not continue to be the case, demand is still strong and the earnings miss from retailers in the past couple of weeks were caused by an increase in their costs rather than a slowing in demand. The next couple of months will be very important as companies will need to raise prices to increase profit margins and the question is will demand continue to be just as strong.
The current inflation we are currently seeing is on the top of the list for the Fed to get under control. The main tool they can use to slow inflation is by raising rates which is typically not positive for equities. By raising rates, the Fed slows down the economy and makes access to capital not as easy and costlier. The recent Fed meeting minutes showed an expectation of two more 0.50% rate hikes but signaled after that they may slow down the tightening. This was positive news for equities giving them something to rally on last week. The key in the coming months will be to see if the Fed can execute their “soft landing”, in other words, slow inflation down to more normal levels while not slowing the economy down so much that it leads to a recession. If the Fed can successfully do both, the market will react very kindly as the main worry for many investors will be solved.
What is the market currently pricing in to be the Fed Funds rate at the end of the year? (Scroll Down for Answer)
Have a Great Week!
4. 2.64%, the current effective Fed Funds rate is 0.83% as the target is 0.75% – 1.00%. This would mean the market expects the target to be raised to 2.50%-2.75% by the end of the year leaving another 1.75% in hikes to be seen by the December meeting.