The S&P 500 had its worst first half of a year since 1970. The carousel of concerns continues to turn as investors deal with one of the most complicated investment backdrops in recent memory. As investors navigate this market, the result has been lower valuations for the S&P 500. In fact, the entire year-to-date decline for the S&P 500 has come from valuation contraction, while forward earnings estimates have remained resilient.
Investors will receive another important piece of the puzzle on Friday of this week as key jobs data for the month of June is released. The job market has been strong, and the unemployment rate sits near its pre-pandemic low. This has been an asset to the U.S. economy. Furthermore, a strong labor market is one of the reasons the Federal Reserve (Fed) has been confident in raising interest rates at speeds not seen in decades. Even some softening in the labor market is unlikely to deter the Fed from fighting inflation and restoring price stability.
As the Fed attempts to engineer a soft landing, recession fears have come to the forefront of market participants’ minds. While the risks for a recession have risen, our view is that it is not a foregone conclusion. While there is weakness in parts of the U.S. economy and financial conditions have tightened, the strong labor market as well as resilient consumers and businesses are positive offsets.
A look back
- U.S. stocks continued their decline last week, falling 2.2%. International developed (-2.2%) and emerging market stocks (-1.6%) followed suit.
- The 10-year U.S. Treasury yield fell by 0.24% due to recession fears, continuing its decline from a 3.5% peak in mid-June. This drove +1.3% performance in the Bloomberg Aggregate Bond index. Shorter-dated yields saw a similar material decline.
- The May Core PCE inflation measure showed a 4.7% annual increase year over year. This was an improvement from the 4.9% reading in April.
A look ahead
- Now that the second quarter is wrapped up, investors will look to the upcoming earnings season to see if earnings and profit margins begin to show signs of weakness.
- The jobs report will be in focus this week as investors look for any signs of softness in the report and the potential impact on the path of monetary policy.
- Economic Releases: Factory Orders, Durable Goods Orders, S&P Global U.S. Services, Nonfarm Payrolls, and the Unemployment Rate.