A challenging second quarter for both stocks and bonds mercifully came to an end as uncertainty weighed heavily on global financial markets. June was a particularly poor month for asset prices as investors grew weary of the all too familiar issues that have been plaguing the markets: trade and supply chain bottlenecks, soaring inflation, the Ukraine war, and the troublesome pandemic. On the inflation front, sharply higher food and energy prices continued to present challenges for consumers and businesses alike. In June, the U.S. Consumer Price Index (CPI) recorded a jump of 9.1% versus a year ago, a multi-decade high and a hotter than expected result.
On the bright side, the U.S. economy has shown some positive signs of late, with consistent strength in the job market being the highlight. For the fourth consecutive month in June, the unemployment rate maintained an impressive 3.6% level as the broader economy added jobs at competitive wage levels.
The Federal Reserve Bank will play a key role in how the markets fare in the months ahead, as they consider their dual mandate of stable prices and full employment. Currently, the Fed has identified inflation as the priority, and is willing to slow the economy at all costs to re-establish reasonable price levels. At their upcoming Federal Open Market Committee meeting scheduled for July 26th and 27th, Chair Powell is widely expected to increase interest rates by at least another .75% to further combat inflation.
With earnings season getting underway, Corporate America is expected to report profit growth of 5% in the second quarter, which would be the slowest increase since 2020. In recent months, business leaders have lowered capital investment plans for their companies, buffeted by the higher costs of doing business. Valuations for stocks in the S&P 500 benchmark have been adjusting lower for slower earnings growth, with the average company now trading at 16-times earnings and well below the twenty-five-year valuation average. On the consumer front, spending budgets have also been trimmed as savings built up during the pandemic have been depleted and households think twice about discretionary purchases. Putting it all together, a cautious investment approach continues to make sense as the global financial markets handicap the odds of either an upcoming recession or an engineered soft-landing for the economy.