Weekly Market Update 6/6/2022

Wall Street has faced many obstacles this year. The primary concern is high inflation, which is pushing the Federal Reserve to aggressively tighten the monetary reins. The central bank raised the benchmark short-term interest rate by three-quarters of a percentage point this year so far and is expected to implement half-point hikes at both the June and July Federal Open Market Committee meetings. 

The Fed is keen on slowing demand. The hope is that a “tighter” money supply will reduce demand for goods and services, and thus slow inflation. The strategy is working in the housing market, with higher mortgage rates and high prices resulting in declines in April’s existing and new homes sales. For many products, supply problems have contributed to higher prices, and the recent news that European leaders have agreed to ban 90% of the Continent’s oil imports from Russia by year’s end will likely put further upward pressure on energy prices worldwide. 

April’s personal income and spending report, though, brought some hope that inflation may have peaked. Specifically, the core personal consumption expenditures (PCE) index, considered to be the Fed’s favorite measure of inflation, rose 4.9% year over year for the month of April. Although still high, the pace eased from the 5.2% March advance and was the first deceleration in the index in 17 months. 

All the while, U. S. consumers continue to reach into their pockets. In fact, personal consumption climbed 0.9% in April, even though wages expanded only 0.6%. The tight labor market, which generally means employee bargaining power in terms of wages and employment conditions is stronger, is a big reason why the consumer is expected to keep spending. But it also may potentially add to inflation. 

Conclusion: The month of May did not bring many flowers for investors. Indeed, the 31-day stretch included the longest weekly losing streak for the Dow Jones Industrials since 1923. For the most part, when the market attempts to rally, investors are quickly reminded of the adage “don’t fight the Fed.” With the central bank wedded to tightening the monetary reins, volatility persists, and, in such stretches, we believe a well-diversified portfolio of high-quality companies may be the best way to limit possible downside risk. 

Source: ValueLine.com