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Markets & Macroeconomics

After the Fed enacted a supersized 75bps interest rate hike during their June meeting, Consumer Sentiment, as measured by the University of Michigan Consumer Sentiment Survey, fell to its lowest level in history. The previous record low occurred during the Great Financial Crisis of 2008 when the financial system was wrought with systemic issues, which was only slightly lower than the 1980s when inflation, as measured by the Consumer Price Index, was running close to 15% on an annualized basis. The FOMC made this decision on the heels of an inflation reading, as measured by the Consumer Price Index, which came in well above expectations of +8.3% at +8.6% for the month of May on an annualized basis. Throughout the month, FOMC members’ rhetoric continued to promise that taming runaway inflation was their top priority. Chairman Powell gave guidance during his press conference that they do not anticipate rate hikes of this magnitude in future hikes but left some wiggle room by saying that a 75bps hike for the next meeting in July is not off the table. With the Fed increasing their pace of the tightening of financial conditions, the effects of this policy regime are reverberating across the economy. As mentioned above, consumers are feeling the pressure of this tightening as evidenced by Consumer Sentiment falling to its lowest level in history, additionally, GDP for the first quarter of the year came in below expectations of -1.5%, landing at -1.6% on an annualized basis. With this being the second reading in a row of contraction in economic production, as measured by change in GDP, the U.S. economy is in what is called a technical recession. While concerning, GDP readings are often volatile due to the inexact science that goes into the calculation methodologies, which often leads to market participants taking these readings with a grain of salt. Regardless, it seems that the strong labor market is the one area of the US economy that continues to boom, cushioning the impact of the contraction in economic production.

Bottom Line:
The Fed continued to tighten monetary policy and upped their game in June by enacting a 75bps hike in interest rates. The effects of this tightening are hitting consumers hard with Consumer Sentiment falling to its lowest levels in history. Consumers aren’t the only ones feeling the pressure, as this tightening has led to a contraction in GDP numbers for the second quarter in a row, landing the US economy in a technical recession. Despite this, the labor market remains strong and may prop up the economy.

Quick Takes:

  • Large or Small? It Didn’t Matter Much. Closely tracking each other throughout the month, especially the second half, Large Caps barely outperformed Small Cap equities by a thin margin. Growth outperformed value by a healthy margin for June, but both indices were deeply negative for the month.
  • High Beta Gets Crushed and Quality Underperforms Momentum. High Beta equities plummeted by almost -13% for June, versus their Low Volatility peers down only -4.36% for the month. Quality and Momentum style equities were in a general lockstep for the month, but Momentum was able to outperform by a small margin.
  • Domestic over International, Emerging over Developed. Domestic equities outperformed their International peers by almost 50bps, but Emerging Market equities were able to post a superior month to both Domestic and Developed International equities as positive news from China began to emerge.
  • Short Over Long, Quality Over High Yield. Longer Dated bonds spent the first half of the month in near free fall but recovered some before going on a rollercoaster ride for the second half of the month. Ultimately, Shorter Maturities posted a slightly positive month while Longer Maturities were down -2.26% for June. Investment Grade, while still negative, posted a strong margin versus their lower quality, higher yielding peers.
  • Safety Beats Inflation for May. Despite Inflation surprising to the upside for June, investors flight to safety ultimately won out with Treasuries outperforming their Inflation Adjusted peers.
  • Munis Outperform Taxables and Domestic Outperforms International. Munis posted a small margin on Corporates and Domestic bonds posted a strong margin of outperformance against International bonds.

Asset Class Performance

The Importance of Diversification. From period to period there is no certainty what investment will be the best, or worst, performer. Diversification mitigates the risk of relying on any single investment and offers a host of long-term benefits, such as less portfolio volatility, improved risk-adjusted returns, and more effective compounding.

Source: Bloomberg. Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by the Prime Capital Investment Advisors. The performance of those funds June be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares U.S. Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by: 30% U.S. Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.

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