The arduous road to stable prices from high inflation and the threat of a U.S. recession has proved to be a long and winding journey that has left many investors asking: Are we there yet? The short answer is: No, we are not there yet. Despite ten rate hikes since March of 2022, resulting in an aggregate interest rate increase of 500 basis points or 5%, the U.S. economy has shown more underlying strength than predicted, resulting in consumer prices that are still too high.
As the second quarter began, investors were on high alert, waiting for a recession, assuming the Federal Reserve would soon be cutting rates as the economy slowed down. However, by the end of June, there was still no economic downturn in sight, inflation remained sticky, and the Fed is now expected to keep rates higher for longer. Even as the Fed paused in June, the first time since March of 2022, Fed Chairman Jerome Powell signaled that interest rates will likely need to be raised at least two more times as inflation remains well above their 2% target.
As a result of the resilient economy, equity markets continued to march higher in the second quarter, with this stronger-than-expected economic growth. Since January, over 1.6 million jobs have been created, which marks the 30th consecutive month of positive job growth.
There has also been excitement regarding the long-term potential for artificial intelligence (AI), lifting market sentiment. This year’s market rally has been unusually concentrated in just seven technology names, which have accounted for 75% of the total return of the S&P 500. Only in June did the rally broaden into the rest of the market, including small and mid-cap equities. The current market has been pricing in the end of the rate hiking cycle and a Fed pivot towards rate cuts, which is something we believe will not happen until 2024, at the earliest. We continue to believe that a mild recession is in the cards at some point over the next 6-18 months as the Fed is dead-set on getting inflation under control, even if means negative economic growth.