Inflation was the dominant story for the first half of June. Fears that a key inflation report would show higher than expected rates pushed markets down last Thursday (June 9). The Dow Jones Industrial Average (Dow) fell 1.95%, the S&P 500 closed 2.4% lower and the NASDAQ Composite Index (NASDAQ) lost 2.75%. As the markets feared, last Friday’s Consumer Price Index (CPI) report came in at 8.6%, slightly higher than the 8.3% that most economists expected. This elevated level of inflation drove markets lower as the Dow closed down by 2.72%, the S&P by 2.91%, and the NASDAQ by 3.53%. The slide continued on Monday (June 13) with the Dow losing 2.79%, the S&P 500 3.88%, and the NASDAQ 4.68%.
Why are the markets so concerned with inflation numbers? A sustained high inflation reading suggests that the Federal Reserve (Fed) may be more aggressive in increasing interest rates. Increased interest rates, in turn, tend to slow economic growth and stock market gains. If the Fed increases rates too quickly or by too much they can tip the economy into a recession. There’s an old saying that goes: Bull markets don’t die – the Fed kills them.
Prior to last week, the markets were anticipating a 0.5% interest rate hike. As mentioned above, concern that the Fed would act more aggressively and increase rates by 0.75% or more surfaced last week pushing markets lower. Yesterday (June 15) the Fed wrapped up their most recent meeting and chose to increase rates by 0.75%, which notably is the largest single rate increase since 1994.
Markets breathed a sigh of relief that the Fed did not act more aggressively and posted strong returns after the announcement. The Dow was up 1%, the S&P 500 increased 1.46% and the NASDAQ rose 2.5%.
We are hearing the term “recession” thrown around more frequently these days. Technically a recession is defined as a period of 2 successive quarters of contracted economic growth. During yesterday’s press briefing Fed Chairman Jerome Powell tried to reassure the markets saying, “We’re not trying to induce a recession.”1 The Fed’s actions may very well slow economic growth and may impact unemployment, but the fundamentals of our economy are still strong.
In other economic data, last week’s weekly jobless claims came in at 229,000 which was the highest number since January 2022. However, the continuing jobless claims rate remained unchanged at 1.3 million – which suggests companies are still hiring.2 This is significant because companies typically stop hiring new employees when recession fears are high.
As of the end of April (4/30/22), the number of job openings nationwide was 11.4 million, while the number of jobless Americans was 5.94 million.3 With nearly 2 jobs open for every unemployed individual the economy still looks to be in strong shape.
Wrapping up returns for the first half of the month, the markets were all lower. As of June 15th, the Dow fell 2,322 points (7.04%), the S&P 500 dropped by 342 points (8.28%) and the NASDAQ lost 982 points (8.13%).
1 www.nytimes.com, “Fed Takes Aggressive Action in Inflation Fight”, June 15, 2022
2 www.forbes.com, “Dow Drops 600 Points ahead of Looming Inflation Report”, June 9, 2022
3 Department of Labor monthly jobless claims report 4/30/2022