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Some Thoughts on a Very Difficult Week

Last week proved to be an exceptionally difficult week in what has been a very difficult year for US investors. The S&P 500 entered a bear market on Monday, June 13 when it sold off nearly 4% on the day to close nearly 22% lower from its all-time high of 4,819, before moving lower still and closing out the week off almost 23% year to date and nearly 24% from its all-time high. It was the worst week for the S&P since March of 2020.

As has been the case for much of 2022, concerns about interest rates and inflation weighed on risk assets, as investors continued to digest the prior week’s hotter-than-expected May CPI report, while the US Federal Reserve – somewhat surprisingly – telegraphed and then moved ahead with a 75 bps hike in the key Fed Funds rate—the largest increase since 1994, and indicated it could hike rates another 75 bps at its July meeting. While markets did initially rally on the more hawkish move by the Fed, they faltered soon thereafter over worries the Fed might be tightening too far, too fast, and putting the US economy at risk of recession. And beyond the nascent bear market, talk of possible recession dominated Wall Street last week, with some market observers pointing to disappointing data on housing, retail sales, and initial jobless claims as proof the economy is rolling over. What is somewhat ironic is that investors should be rooting for weaker economic data as that should induce weaker inflation data which should allow the Fed to ease up on its rate hiking campaign into the fall (the proverbial “soft landing”), an inflection point that should put a meaningful bid under the market.

It won’t be easy, but we think the US economy can avoid a recession as we move through the back half of 2022 and into 2023. Quite simply, economic downturns tend not to happen when the labor market is this strong (the unemployment rate is 3.6%) and the spread between the yield on the US 3 Month Bill and the US 10 Year Note is this positive (see chart; that part of the yield curve has inverted prior to each of the last three recessions). Finally, as it concerns the market, when investor sentiment is as negative as it is today, stock prices have historically been meaningfully higher 12 months out.

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The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital Investments, LLC, a registered investment advisor. 1080-BCI-6/21/2022

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