Last week’s inflation-driven weakness extended into Monday, with markets finishing firmly to the downside, including the Standard & Poor’s 500 closing in bear-market territory.
All eyes are on Wednesday’s Federal Reserve rate hike announcement, with performance across financial markets Monday signaling ongoing worries about the monetary policy response that will be required to bring inflation down.
Treasury yields were notably higher, prompting underperformance of growth versus value, driven principally by extended weakness in technology stocks.
Consumer staples and health care sectors held up best along with strength in the U.S. dollar, reflecting a flight-to-safety tone in Monday’s moves.
Crypto investments also captured attention, with bitcoin plunging to its lowest levels since 2020 on news that a crypto-lending company is halting withdrawals.
All told, uncertainty around the potential economic impacts stemming from high inflation and accelerated Federal Reserve tightening remains in the driver’s seat for the markets.
Edward Jones analysts said they think these headwinds will continue to blow through the summer, with volatility persisting until there’s greater clarity on the path for inflation to move lower.
Treasury yields were significantly higher again Monday, extending Friday’s jump that followed the latest inflation report.
Two-year rates have seen the sharpest move, while 10-year rates have seen a marginally smaller jump.
Analysts said they think this flattening of the yield curve reflects a shift in expectations toward an even more aggressive Fed tightening path, along with more pessimism around the outlook for gross domestic product growth ahead.
Stock and bond markets will remain in a defensive posture ahead of Wednesday’s Fed rate announcement.
The size of this week’s rate hike is the subject of debate among investors, but analysts think the Fed’s commentary around its plans for future hikes will be more influential for upcoming market moves.
Analysts have held the view that this year’s jump in interest rates had largely priced in a necessary amount of Fed tightening, but with headline inflation remaining stickier for longer than anticipated, it’s become increasingly likely that the Fed may have to ramp up and extend its rate hikes in the coming months.
Evidence continues to support the view that core inflation (which excludes food and energy prices to inform Fed policy) is moderating, but rising food and energy costs have sapped consumer sentiment to the point that household spending may be more negatively impacted than previously expected, despite the ongoing support from a healthy labor market.
Equities are down more than 20 percent from record highs in January.
Pullbacks, while not uncommon, are often uncomfortable, and analysts think periods like this are when investors are best served by proper perspective and portfolio diversification.
They said they doubt market volatility will disappear any time soon, and think a durable rebound will require confirmation of moderating inflation as well as visibility around the Fed’s ability to begin to take its foot off the rate-hike brake.
This does not, however, mean investors should throw in the towel, as analysts think this pullback is creating compelling opportunities for those with a broader time horizon.
They think diversification across asset classes and a focus on higher-quality investments can help navigate this space of volatility, while also positioning investors to benefit from a return of optimism as the year advances.