Two Quarters and Eight Weeks

Weekly Market Update | August 2, 2022

Highlights

The global equity market continued to push higher last week with the MSCI World Index now up 6.5% over the last two weeks. In the United States, the tech-heavy NASDAQ surged 4.7% as the real 10-year Treasury yield fell sharply last week. The S&P 500 jumped 4.3%. Non-U.S. markets posted positive returns as well but with more muted gains. European stocks climbed 2.6% while Japanese stocks edged 0.9% higher. Emerging market stocks rose just 0.4% as the MSCI China index tumbled 3.7%.

The U.S. economy has now experienced two quarters of economic decline. This would often be referred to as a recession with 1947 providing the only modern example of two consecutive negative real gross domestic product (GDP) prints that there were not labeled as a recession, but strong monthly employment reports suggest that the economic decline is not yet broad-based.

Fed Chair Powell stated that he also does not believe that the U.S. is in a recession. However, he did seem to acknowledge that the economy is indeed weakening. While still deciding to raise interest rates by another 75 basis-points, he also mentioned that the federal funds rate is already near the neutral rate (meaning interest rates are now near a level that neither stimulates nor slows down the economy). While the central bank will likely still raise rates to a moderately restrictive level, the market’s takeaway was that the Fed may start to slow the pace of rate hikes soon. The Fed will now have eight weeks before its next FOMC meeting.

Lastly, President Biden’s Build Back Better proposal has resurfaced as the scaled down Inflation Reduction Act of 2022. The slimmer bill is projected to reduce the federal deficit by about $300 billion over 10 years. It is not expected to meaningfully bring down inflation or materially impact individual taxes.