Weekly Market Update with Brian Ransom 17 June 2022

Welcome to the weekly market update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this week.

Following a troubling reading on the consumer price index and a subsequent announcement from the Fed to increase rates 75 basis points, the market has fallen 12% since June 7 and 23% from all time highs. Currently, the market is rapidly approaching pre-pandemic highs established in early 2020, effectively wiping out all gains from 2021.

In the news this week, volatility continues to grip the crypto markets as layoffs ramp up at the major exchanges. The Federal Reserve raised their benchmark rate by 75 basis points. And 60% of CEO’s surveyed see a recession in the next 12-18 months.

Now, with all the recessionary fears in mind, let’s spend some time breaking down how interest rates, growth, the economy, and the market all typically react during business cycles. The typical business cycle begins with a long period of growth during which the Federal Reserve tries to control by raising interest rates to prevent excessive inflation. Usually, the stock market grows during this period. Then, a critical tipping point is typically reached in interest rates that causes volatility in the bond and stock market, inverting the yield curve, and causing pain in the economy typically sending it into a recession (the bars marked in gray). The Fed then reacts to a contracting economy by lowering interest rates and the market usually contracts in conjuction until liquidity and confidence is restored to the system and the whole cycle begins anew. Interestingly, for this cycle, the market is actually contracting early in reaction to rising interest rates. This may mean we are already past the critical tipping point for interest rate increases and the Fed could be inducing a recession to slow inflation.

Which means the most important data point in the market right now is of course inflation. From here on out, the trajectory of the month-over-month increase in consumer prices is critical. Sustained month-over-month readings of 50 basis points would mean core inflation remains high. Whereas a taper down to 20 basis points would indicate a disinflationary environment has begun. At that point, a Taper would mean lower interest rates and a subsequent recovery. Whereas a sustained inflation rate would mean higher interest rates and continued volatility.

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