Weekly Market Update

For most investors, the approaching long weekend is particularly welcome (markets are closed Monday in observance of Juneteenth) as the S&P 500 officially entered bear market territory this week due to continued headwinds from last Friday’s hot consumer price index (CPI) coupled with the Federal Reserve’s decision on Wednesday to hike interest rates 75 basis points (0.75%) for the first time since 1994. The market initially cheered the Fed’s decision to raise rates more aggressively, but concerns of a possible Fed policy mistake pushing the economy into recession soon followed and the S&P 500 closed lower for the 10th week over the last 11, something that has only occurred one other time, in 1970 (per LPL Financial). Furthermore, the breadth of losses has been unprecedented as entering Friday, five of the past seven market sessions had seen more than 90% of stocks in the S&P 500 move to the downside, an overwhelming display of selling that going back to 1928 had never previously occurred (per SentimenTrader). Therefore, the mood on Wall Street is possibly even more somber than the coronavirus borne bear market in March 2020 and investors limped into the weekend looking for any potential upside catalyst in a market with no shortage of pessimism.

It is difficult to be bullish during this period of relentless bond and stock market weakness and we certainly would not call a bottom until inflation shows signs of peaking, but there are a few potential silver linings. We are in deeply oversold territory and market sentiment and positioning is a potential contrarian buy signal with the Bank of America Bull & Bear indicator now at 0 and the firm pointing to strong three-month returns after hitting this level in the past. Perhaps most notable, however, has been the recent move in energy as on Friday oil tumbled over 6% to a four-week low and stocks in the energy sector fell over 17% in just five days (as measured by XLE). Furthermore, wholesale gas prices fell 12% this week, which would be the worst week for gasoline since March 2020 (per CNBC). Ultimately, we would need to see more sustained weakness in energy before considering the implications to inflation, but this could be an important step towards the right direction. Next week, the Fed Chair Jerome Powell will deliver his semiannual monetary testimony to Congress on Wednesday (Senate) and Thursday (House) and we expect the market to key on any comments around inflation and Fed policy guidance.

Ian G. Browning, CFA
Managing Director, Investment Strategies | Shareholder