Tune In

The latest inflation numbers confirm that the prices of everyday goods and services are still rising despite Fed rate hikes and a slowing economy. Major stock market indices continue to be in or near bear market levels, with the S&P 500 down 25% year-to-date, while interest rates jumped further last week, with the 10-year Treasury yield rising above 4%. Whether the Fed can regain control of inflation while keeping the economy steady remains the central question for investors and economists. Since inflation data is only released monthly, GDP data quarterly, and the Fed only meets once every six weeks, it could be some time before this question is fully answered.

Global markets pulled back again last week following the Fed's announcement that it would tighten by another 75 basis points and keep rates higher for longer. Major indices are back to their June bear market lows, with the S&P 500 falling 23% year-to-date and the Nasdaq down 31%. Bonds have also struggled as all interest rates across the inverted yield curve have jumped, with the 2-year Treasury yield rising to 4.2% and the 10-year to 3.7% - the highest levels since 2007 and 2010, respectively. Investors have been navigating this challenging market all year, and, for many, it may feel as if there is no relief in sight.

The market recovery has hit a bump due to uncertainty around interest rates and the Federal Reserve. Interest rates have driven markets all year with significant impacts on risk assets, economic growth, the housing market, energy costs, and the value of the dollar and foreign currency exchange rates. In an environment like this, market expectations matter just as much, if not more, as the actual numbers.

As challenging as international investing has been over the past several years, it has also never been more critical. While developed and emerging markets may be more susceptible to economic shocks, geopolitical instability, and factors such as the pandemic, this is also why they may have higher expected returns in the long run. Investing across geographies, especially when valuations are attractive, is a vital way to improve diversification as the global economy recovers from recent energy and inflationary shocks. How can investors maintain perspective around international investments today?

Investors and economists have breathed a sigh of relief as new inflation data suggest that price pressures are easing. While the prices of everyday goods are still significantly higher than a year ago, some of the underlying trends are beginning to reverse. This is largely in line with our Inflation Inflection note earlier this year that inflation would likely start to ease come the summer months. Stocks have rallied as markets price in hopes the Fed will pivot soon. The S&P 500 and the Nasdaq have now gained 16.7% and 22.6%, respectively, since the middle of June when oil prices peaked and the Fed began accelerating its rate hikes to fight inflation. But we’re not chasing the rally. Why? We view market expectations for a dovish pivot as premature and that a pivot will come later as the Fed is now responding to pressure to tame inflation.

As the economy slows, some investors are worried about the possibility of a recession and the long-term consequences of ever-growing government debt. These concerns are timely due to recent economic data and policy decisions, including the Inflation Reduction Act making its way through Congress.

Last week's report on the country's Gross Domestic Product for the second quarter confirmed that the economy shrank in the year's first half, a fact that some investors and economists had already suspected. Broad-based inflation, rising energy prices, higher interest rates, and a strong dollar dragged on growth for the second consecutive quarter.

As we enter the second half of the year, investors continue to grapple with inflation, higher interest rates, the Fed, and the prospect of a recession. If historical bear markets are any indication, investors' decisions during this period will have long-lasting effects on their portfolios.

We are set for the release of a ton of economic and business data this week, U.S. consumer confidence, U.S. Q2 GDP, Euro Area inflation & Q2 GDP, U.S. personal consumption expenditures, consumer spending, and a slew of major corporate Q2 earnings reports such as Apple, Alphabet, Amazon, and Microsoft. However, the spotlight will be on The Fed's interest rate decision and press conference on Wednesday.

We've been writing for some time now about how inflation was going to ramp higher and faster than most were anticipating as the economy reaccelerated out of the pandemic-induced recession. It seems that many market participants, including the Federal Reserve, are playing catch-up.