Walking a Tightrope

Weekly Market Update | March 28, 2022

Highlights

The MSCI AC World Index logged its second straight week of gains – a welcome reversal after five consecutive weeks of declines. In the United States, the S&P 500 added 1.8% while the NASDAQ jumped 2.0%. The Dow Jones lagged with just a 0.3% rise. Overseas, European stocks dipped 0.8% while Japanese stocks climbed 1.7%. Emerging market stocks eked out a 0.2% gain as Chinese stocks struggled with the country enforcing new COVID-19 restrictions. The 10-year U.S. Treasury yield surged 32 basis-points to 2.47%.

The Federal Reserve has a dual mandate of maintaining both full employment and price stability. With inflation soaring to 7.9% year-on-year in February 2022, the Fed is clearly feeling the pressure to act and has signaled that a 50 basis-point rate hike may be on the table at its May meeting. This is leading investors to wonder if a recession may be on the horizon should the Fed overtighten in response to inflationary pressures.

A “soft landing” for the U.S. economy is possible with the Fed successfully tightening monetary policy in 1965-1966, 1983-1984, and 1993-1995 without experiencing a drop in real economic growth. However, the Fed’s track record on combating inflation is less than stellar with core inflation continuing to rise in 9 of the last 11 tightening cycles. When a “hard landing” did occur, it took nearly two years after the onset of Fed tightening for the recession to form.