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Highlights
The global equity market gave back recent gains as U.S. inflation took a step backward - rising from 8.3% in April to 8.6% in May. In the United States, the tech-heavy NASDAQ tumbled 5.6% as the 10-year U.S. Treasury yield surged 22-basis-points to 3.16%. The S&P 500 slid 5.1% while the Dow Jones Industrial Average closed the week off by 4.6%. Markets overseas did not go unscathed with European stocks sliding 5.6% and Japanese stocks edging 2.2% lower.
Inflation is created when too much money is chasing too few goods. It should not be surprising that inflation has reared its ugly head after policymakers spent $5 trillion on COVID aid and the Fed expanded its balance sheet by a similar amount amid disrupted supply chains. Hindsight is once again 20/20.
Today's backdrop is a textbook example of supply and demand trying to find a new equilibrium. Unfortunately, it is much more nerve-wracking to live through than to read about. With the Fed uncomfortable with the pace of inflation, an outsized rate hike that is over 50-basis-points (or perhaps another 50-basis-point rate hike in September) cannot be ruled out. However, we still believe that inflation may be in the process of topping out and that investors may be best served by remaining patient. After all, “time in market is often more important than timing the market.”
The next Weekly Market Update will be published June 27, 2022 as we observe the June 19th Federal holiday that commemorates the end of slavery in the United States.

Citi Personal Wealth Management
A Textbook Example
We remember many people saying that the end of the pandemic would lead to a period like the Roaring 20s. Well, we did get at least one year of exuberance in 2021 with U.S. households’ net worth surging by nearly $40 trillion (see figure 1). However, we are now dealing with the hangover, which is inflation. If you’re not an economist, don’t worry, inflation is easy to understand. It is created when too much money is chasing too few goods. As such, it should not have been surprising that policymakers would generate inflation as U.S. Federal spending surged by $5 trillion (a $1.9 trillion covid relief bill was passed in March 2021 under President Biden and a $3 trillion aid bill was passed under President Trump and the split Congress in 2020) and the Fed expanded its balance sheet by $5 trillion amid disrupted supply chains (see figure 2). This was then worsened by the unexpected invasion of Ukraine. Hindsight is 20/20 on this one.


The question is where do we go from here? Citi Global Wealth Investments (CGWI) sees the global economy slowing from about 5.6% in 2021 to just 2.6% in 2022 while the U.S. economy may slow from about 5.5% in 2021 to 1.9% in 2022. This type of slowdown alone was likely to lead to weaker equity markets than in 2021, but now investors also need to consider how aggressive the Federal Reserve will be in combating inflation through higher interest rates. With the Fed tightening monetary policy into a slowdown, both stocks and bonds have sold off throughout much of the year. In fact, this has been an historic sell-off in the sense that both stocks and bonds have each sold off by more than 10% over the past six months. However, that may present as opportunity as well.
We studied the past five times when both the S&P 500 and the 10-year U.S. Treasury sold off by more than 4.5% over a period of six months and looked at what happened during the following six months. What we found was that the S&P 500 averaged a gain of about 5.5% – rising in 3 out of the 5 cases – while the 10-year Treasury rallied in every instance with an average return of about 11% (see figure 3).
Fed Tightening Period | Fed Funds | S&P 500 | |||
---|---|---|---|---|---|
Start | End | S&P 500 | 10-Year U.S. Treasury | S&P 500 | 10-Year U.S. Treasury |
3/31/1969 | 9/30/1969 | -8.3 | -5.2 | -3.7 | 6.8 |
9/30/1979 | 3/31/1980 | -6.6 | -12.9 | 22.9 | 10.0 |
3/31/1981 | 9/30/1981 | -14.6 | -7.0 | -3.6 | 16.4 |
11/30/1983 | 5/31/1984 | -9.5 | -6.5 | 8.7 | 21.0 |
12/31/1993 | 6/30/1994 | -4.8 | -7.5 | 3.4 | 0.2 |
10/31/2021 | 4/30/2022 | -10.3 | -10.5 | ? | ? |
Average: | -9.0 | -8.3 | 5.5 | 10.9 |
We realize that inflation took a step a backwards in May with the consumer price index (or CPI) rising from 8.3% to 8.6%, but we should not ignore that core inflation continued to slow from a peak of 6.5% to 6.0% in May. Rising rents, foods prices, and energy prices will likely keep the gauge elevated, but when excluded, prices have fallen from a peak of 7.6% in February to 6.4% in May – over a full percentage point in just a few months. We find that encouraging and a possible sign that we are still closing in on peak inflation with several retailers recently stating that they may need to slash prices on goods due to bloated inventories. Financial markets have subsequently abandoned the idea of a “September pause” from the Fed and are now pricing in three more 50-basis-point rate hikes this year (see figure 4). The odds of a 75 basis-point rate hike at this Wednesday’s Federal Open Market Committee (FOMC) meeting have risen but are still being placed at just 26% at the time of this writing.
While investors have put the possibility of an outsized rate hike (something larger than 50-basis-points) back on the table, we are hopeful that the Fed will eventually show a willingness to allow supply and demand forces to rebalance over time. Either way, we suspect that moving forward Treasury yields may react less to “upside” inflation surprises and more to “downside” growth surprises. If the U.S. economy is indeed headed towards a recession because the Fed is going to overtighten, then yields will likely fall as growth contracts. Likewise, if we look at total fixed income returns during past stock market corrections of over 20%, long-duration U.S. Treasuries were the best performing fixed income asset with an average total return of 12% (see figure 5). Even if yields haven’t peaked just yet, we still think that bonds are now a reasonable alternative to equities with yields having risen materially.

TOTAL RETURNS IN FIXED INCOME DURING 20% PLUS U.S. STOCK CORRECTION(%) | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|
10 | # DAYS |
US TREASURY |
US TREASURY SHORT |
US TREASURY INTERMEDIATE |
US TREASURY LONG |
US INVESTMENT GRADE CORPORATES |
US INVESTMENT GRADE CORPORATES SHORT |
US INVESTMENT GRADE CORPORATES INTERMEDIATE |
US INVESTMENT GRADE CORPORATES LONG |
US HIGH YIELD CORPORATES |
Mar-01 | 251 | 12.4 | 9.1 | 12.6 | 14.8 | 12.4 | 9.9 | 12.4 | 13.2 | |
Jul-08 | 197 | 7.6 | 5.1 | 8.4 | 9.4 | 2.2 | 3.9 | 3.2 | 0.4 | (4.4) |
Mar-20 | 17 | 4.3 | 1.5 | 3.1 | 10.7 | (4.0) | (0.7) | (2.4) | (7.0) | (10.8) |
Average | 155 | 8 | 5 | 8 | 12 | 4 | 4 | 4 | 2 | (8) |
At the end of the day, this is really about supply and demand rebalancing after the earthquake that was COVID. We honestly can't think of a more visible display of the economic theory than what we are seeing today. Unfortunately, it is more nerve-wracking to live through than to read about, but we suspect that as time progress investors will learn yet another textbook example, which is that "time in the market is often more important than timing the market (see figure 6)."
Stock Market Index | Date of Last Record High | Percent Change from Record High | Percent Change from Global Financial Crisis Bottom (March 9, 2009 to June 13, 2022) |
---|---|---|---|
NASDAQ Composite | 11/19/2021 | -32.7% | 752.0% |
Russell 2000 | 11/8/2021 | -26.3 | 424.5% |
S&P 500 | 1/3/2022 | -21.8% | 454.2% |
Dow Jones Industrial Average | 1/4/2022 | -17.1% | 366.1% |
What Should U.S. Investors Watch in the Week Ahead?
Investors will hear the results of the Fed's June FOMC meeting this Wednesday, June 15th. The consensus is still expecting the Fed to raise rates by 50-basis-points. Investors will also get fresh reads on retail sales, building permits, housing starts, and industrial production. While housing data are expected to show some weakness, industrial production data may show a further recovery on the supply side of the economy.
Market Indicators
Index | Weekly Chg change in percent | YTDyear to date change in percent | 12 Months 12 month change in percent | Div. Yield division yield in percent |
---|---|---|---|---|
Dow Jones | -4.6% | -13.6% | -8.9% | 2.2% |
S&P 500 | -5.1% | -18.2% | -8.0% | 1.7% |
NASDAQ | -5.6% | -27.5% | -19.1% | 0.9% |
Instrument | Weekly Chgchange | YTDyear to date | 12 Months12 month change | Level |
10-Year Treasury Yield (%) | 22.2 bps | 164.5 bps | 172 bps | 3.16% |
Gold ($/Oz.) | 1.1% | 2.3% | -1.4% | $1,871.6 |
Oil ($/bbl) | 1.5% | 56.7% | 71.7% | $120.67 |
Index | Weekly Chg change in percent | YTD year to date in percent | 12 Months | Div. Yield division yield in percent |
---|---|---|---|---|
Global | -4.4% | -17.8% | -13.6% | 2.3% |
Europe | -5.6% | -18.9% | -18.7% | 3.5% |
Japan | -2.2% | -16.7% | -18.4% | 2.4% |
Emerging Markets | -0.5% | -13.6% | -21.7% | 2.8% |
The Week Ahead
Date | Time | Event | Period | Consensus | Prior |
---|---|---|---|---|---|
6/14 | 6:00 | NFIBNational Federation of Independent Business Small Business Optimism | May | 93.0 | 93.2 |
6/15 | 8:30 | Empire Manufacturing | JunJune | 2.5 | -11.6 |
6/15 | 8:30 | Retail Sales Advance MoMMonth over Month | May | 0.1% | 0.9% |
6/15 | 8:30 | Retail Sales Ex Auto and Gas | May | 0.4% | 1.0% |
6/15 | 10:00 | NAHBnational association of home builders Housing Market Index | JunJune | 67.0 | 69.0 |
6/15 | 14:00 | FOMC federal open market committee Rate Decision (Upper Bound) | 6/15/2022 | 1.5% | 1.0% |
6/16 | 8:30 | Housing Starts | May | 1700k thousand | 1724k thousand |
6/16 | 8:30 | Building Permits | May | 1780k thousand | 1819k thousand |
6/16 | 8:30 | Philadelphia Fed Business Outlook | JunJune | 5.0 | 2.6 |
6/16 | 8:30 | Inital Jobless Claims | 6/11/2022 | 218k thousand | 229k thousand |
6/17 | 9:15 | Industrial Production MoMMonth over Month | May | 0.4% | 1.1% |
6/17 | 10:00 | Leading Index | May | -0.4% | -0.3% |