Last Week’s Markets in Review: Soaring Yields and Recession Risk in Focus
Global equity markets finished lower for the week. In the U.S., the S&P 500 Index closed the week at a level of 3,924, representing a loss of 3.23%, while the Russell Midcap Index moved 4.23% lower last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned -4.70% over the week. As developed, international equity performance and emerging markets were also negative, returning -3.00% and -3.41%, respectively. Finally, the 10-year U.S. Treasury yield moved higher, closing the week at 3.20%.
As it turns out, after beginning the month on a high note, August would end its trading in the red last week. Following the Jackson Hole symposium, markets would continue their downward trajectory, ultimately ending the month with the S&P down 4.08%. The fear of continued inflationary pressures and the Federal Reserve’s reiteration of its willingness to continue rate hikes at the expense of economic growth outweighs the positive data on jobs and manufacturing. Regarding jobs, August payrolls increased by 315,000, which was just short of consensus estimates of 318,000, while the unemployment rate rose to 3.7% from 3.5%, likely due to an increase in the labor force participation rate.
September kicked off dramatically, with markets continuing their downward spiral from the prior month in early trading before making a late reversal into positive territory and yields on the short end of the curve generating an even greater inversion. As we have written before, the yield curve in the U.S. has inverted before each recession since 1955, with a recession following the inversion somewhere between six and 24 months, on average, according to a 2018 report by researchers at the San Francisco Federal Reserve. Last week also marked the first time since 2007 that the 2-year treasury would reach a level of 3.5%, sending market participants into an increased frenzy of concern. Curve inversion has not been something new to markets. As of this writing, we currently stand at 43 consecutive trading days of this inversion phenomenon.
When looking at past yield curve inversions, today’s activity becomes even more interesting. Since 1990, there have only been two instances in which the yield curve stayed inverted for longer than we are currently experiencing. From 2/2/2000 to 12/28/2000, the curve was inverted for 229 days before ultimately leading to the dot-com bubble market crash in March 2001. It also remained inverted from 6/8/2006 to 3/20/2007 for 196 days before the great recession began in 2007. If history were to be a guaranteed indicator of future events, it would make great sense why markets are reacting in such a negative fashion. However, past performance, of course, is not indicative of future results.
The macroeconomic backdrop separates us today from the previous events mentioned above. Unlike past recessionary periods, the labor market appears to be relatively strong, as demonstrated by the current 3.7% level of unemployment and falling jobless claims. According to FactSet, the lowest level of unemployment at the start of any recession has been 4.7%, 27% higher than we currently stand. And while inflation is at levels not seen since the hyperinflationary environment of the 1980s, this inflation is mainly driven by supply shocks and not necessarily by consumer demand, which would contradict past inflationary periods.
Investors should consider all the information discussed within this market update and many other factors. However, with so much data and so little time to digest, we encourage investors to work with experienced financial professionals to help process all this information to build and manage the asset allocations within their portfolios consistent with their objectives, timeframe, and risk tolerance.
Best wishes for the week ahead!
Employment Situation data sourced from the Bureau of Labor Statistics. Equity Market and Fixed Income returns are from JP Morgan as of 9/2/22. Treasury data sourced from The U.S. Department of Treasury. Rates and Economic Calendar Data from Bloomberg as of 9/2/22. International developed markets are measured by the MSCI EAFE Index, emerging markets are measured by the MSCI EM Index, and U.S. Large Caps are defined by the S&P 500 Index. Sector performance is measured using the GICS methodology.
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against a loss.