The U.S. economy starts the third quarter with some strong challenges that rattled the ongoing recovery in Quarter 2 and are likely to filter through to the next few months. Among them are lingering inflation, the prospect of several additional aggressive Federal Reserve rate hikes, and pervasive fears about a possible recession.
Even filtering out the common wisdom that the news thrives on the negative, there are realities that are hard to ignore simply because of their day-to-day effect on all of us as we fill up our gas tanks and check off our grocery lists.
Lingering uncertainty has resulted in tumultuous markets, slower growth forecasts, belt-tightening, an economy showing signs of gradual cooling, and recession jitters. Memories of past slowdowns have cast a pall over Wall Street and Main Street.
But the current negative indicators are generally understood to be caused by the massive shift from pandemic shutdowns as global and domestic economies continue to gear back up. Now that we’re just past the midpoint of the year, here are the main headwinds ahead for the Third Quarter.
Inflation
Inflation soared to 9.1% in June—a 40-year high and more than expected. Households paid more for energy, groceries, and housing, including rentals. High fuel costs are also causing a ripple effect which adds to the cost of delivery and increases consumer prices. Lingering inflation has eroded some people’s wage increases and pandemic savings. Supply vs. demand and supply chain issues are still concerns and economists expect they’ll need more time to even out.
Some economists are forecasting that inflation may have peaked, especially since there was some easing of gas prices as the Fourth of July holiday began. The drop at the pump was largely due to decreasing crude oil prices over recession fears, the release of some oil reserves, and competition among gas stations. Supply vs. demand and supply chain issues are still concerns and need more time to even out. But high fuel costs are also causing a ripple effect which adds to the cost of delivery and increases consumer prices.
Interest Rates
The Federal Reserve’s .75% rate increase in May was the highest since 1994 and the Fed has telegraphed that ongoing aggressive hikes will continue in order to rein in inflation. Markets have mostly priced in the increases and the belief is that the Fed is moving in the right direction. The big question is: can they slow the economy without causing a recession, or are they single-mindedly focused on bringing inflation down and willing to withstand the effects of a cooled-down economy? And, will remedies of the past work in today’s world?
Housing
The overheated housing market cooled somewhat as mortgage rates rose in the wake of the Fed’s action. The most notable effect was a pullback in refinancing. But analysts agree that rising mortgage rates will do little to push prices down, although they may rise more slowly. Fannie Mae is predicting another 11% jump in prices this year and inflation in housing—including rents—has outpaced overall inflation figures.
Jobs
The US Department of Labor’s survey of businesses showed that the U.S. added 372,000 jobs in June, better than expected. Unemployment remained steady at a low 3.6%. Prior to the June report, the number of companies planning layoffs also rose slightly. But there are 11 million job openings nationwide and still not enough workers to fill them. Greater labor force participation will hopefully boost productivity and ease supply shortages. Employment appears to remain a strong positive in a field of negative economic news. However, the Department of Labor’s survey of households showed a loss of 315,000 jobs in June, so there are mixed messages.
Stocks
Stocks continue to be volatile, although they were initially cheered by the positive June jobs report. Stocks have been plagued by sell-offs on inflation fears, recession fears, and lower earnings expectations. The stock market’s performance for the first half of the year is the worst since 1970 with the S&P500 dropping 20.6%. Some analysts are worried about the speed of the drop in U.S. housing activity and the potential ripple effects from it. Markets are likely to remain volatile with inflation seen as the biggest risk.
Bonds
Bonds, which often act as a safe haven when stocks drop, saw their worst 6-month start since 1980, with the Bloomberg Barclay’s US Aggregate Bond index dropping 10.35%. The silver lining is that bond yields are now up significantly and, with the markets pricing in telegraphed future Fed interest rate increases, the worst may likely be behind us.
What should investors do?
When negative financial news dominates, it’s tempting to conclude that some sort of reaction or response is called for. But that may be just the opposite of what will best position you to see out the remainder of 2022.
It’s a good time to review investments with your advisor and see how you can stay on track over the next six months. You’ll want to make sure your portfolio is balanced and maybe revisit allocations. It’s a good idea to look at exposure to risk and consider both your near and far-term goals.
It isn’t a good time to sell off out of panic, stop investing, or make any quick decisions based on the news of the day.
It is a good time to remember past market downturns, recessions, and past recoveries and also to realize that however slow to arrive, better days are coming.
Our advisors are ready and available to review your situation and offer perspective in light of your own financial goals. Please let us know how we can help ease any concerns you have and help you enjoy the weeks ahead. www.leskofinancial.com