In June, the stock market ebbed once again, reflecting investors’ concerns about the twin risks of inflation and economic slowdown. These June losses pushed both U.S. and international stocks into bear market territory. Despite a modest late-month rally, U.S. and global stock indices still ended the month down nearly ten percent. Compared to the stock market, the volatility of the U.S. bond market was tame. Still, U.S. bonds lost 1.6% for the month.
The Federal Reserve remains determined to cap and then lower inflation. A high inflation report released mid-month led to a surprise 0.75% short-term rate hike by the Fed. Prior to the mid-month inflation report, the Fed planned a smaller 0.5% increase. Curiously, long-term interest rates didn’t end June much higher than where they began suggesting bond investors’ belief that the Fed’s tightening cycle will continue, but then end after a few more meetings.
While the Fed’s tightening cycle presently consumes much of investors’ attention, economic conditions are also top of mind. The U.S. logged a small decline in first quarter GDP, and a forecasting model run by the Atlanta Fed is estimating a small decline in GDP during the second quarter. Assuming that estimate is true, we experienced back-to-back quarters of GDP contraction while simultaneously seeing an extremely strong labor market. Specifically, the size of the U.S. labor force remains about where it was prior to the pandemic, continuing claims of unemployment are at their lowest level in 50 years, and there are over 11 million unfilled jobs. Business surveys of manufacturing and services firms suggest expansion. Additionally, financial analysts expect second quarter corporate earnings to show large domestic companies’ profits growing by 4% for the quarter. Despite what GDP reports may ultimately reveal, current conditions don’t seem to indicate a contracting economy.
As we move into the second half of the year, inflation and risk of economic slowdown will continue to influence financial markets until a resolution presents itself. While headlines will continue to focus on inflation, we are encouraged by the persistence of positive economic data.