This week was another volatile one with most of the trading action coming as the market digested many actions from the world’s central banks. The markets are appearing to lose faith in the Federal Reserve.
This loss of faith had lots to do with the rate hike, it also had to do with liquidity concerns that smashed the crypto markets, earnings concerns, growth concerns, and strong volatility in the Treasury markets all together have shaken investors’ confidence. Emotions in the market are not positive ones right now, as evident by the fear & greed index which was at a reading of 28 last week.
Crypto, stocks, bonds, and commodities all experienced losses as recession fears grew this week.
The week started with crypto prices entering a freefall on the news that the crypto lender Celsius had suspended customer transfers and withdrawals. Concerns that this may happen among other platforms caused investors to panic sell and forced selling to meet margin calls. Just this week Bitcoin went from roughly $25,000 to $20,000.
Each major index set new 52-week lows. At the lowest, S&P briefly dropped 4.5%. All 11 sectors of the S&P 500 made losses this week with consumer staples doing the best at -4.4% and energy faring the worst with -17.2%. The energy sector, which is still the best performing sector this year, was watched very closely by the market as an indication of potential recession. The energy sector fell as selling interest grew as a result of increasing concerns of global slowdown as banks across the world rose rates higher than expected this week.
The Federal Reserve ended their two-day meeting on Wednesday with a decision to raise the target range for the fed funds rate by 75 basis points to 1.50-1.75%. The meeting also provided updated projections that showed a worsening revision to 2022 real GDP growth to 1.7% from 2.8% and to 2022 PCE price inflation to 5.2% from 4.3%.
Fed Chair Jerome Powell added at his press conference that the coming July meeting will likely have either a 50 or 75 basis point increase. He spoke on a commitment to getting inflation under control, however, the Fed’s actions and adjusted projections created uncertainty.
Afterwards, the Swiss National Bank followed suit with a surprise 50 basis point hike. This was their first hike in 15 years. The Bank of England raised their rate another 25 basis points and downgraded their GDP forecast.
The Bank of Japan continues to be the outlier as it stays steady in its rate and maintained a commitment to yield curve control of keeping the 10-year around 0%. The Forex market was not a fan of that decision, evident in the Yen falling 2.1% against the dollar on Friday.
In sum, the worries about current policy approaches by the central banks being mistakes were widespread in the market. Fiscal policies are necessary but risk excessive stagflation and even recession. Neither outcome bode well for the earnings potential of most companies, causing strong selling interest in stocks this week.
Anticipations of poor earnings paired with the uncertainty caused by central banks has led to the de-risking from stocks into safer Treasury notes. The 2-year Treasury note yield rose 3.18% and reached as high at 3.43% this week.
Next week, we have a shorter week with market being closed on Monday on account of Juneteenth, however there are still a few of economic events later in the week that could prove to be cause for a continued downtrend. Economic events don’t kick up till Wednesday with a testimony from Fed Chair Powell followed by some global PMI readings.
Stay informed, stay patient, and most importantly stay committed to your long-term plan! As dividend investors, markets like this allow us to buy discounted income, sometimes for an extended period of time. Be prepared for that! I was this week with my most recent buys which you can read about in the latest portfolio update here!