Continued Fed Hawkishness Drives Equities Lower and Rates Higher
In the face of rising inflation, the Fed turned increasingly hawkish, which pushed 10 Year US Treasury rates up seventeen basis points to 3.02% in June.
While this was much lower than the 3.48% achieved in mid-month, the fear of continuing higher rates was enough to push equities down 8.8% in June.
Interestingly, while contracting forward PE multiples have driven much of the equity performance to date, earnings expectations have remained firm. However, a closer look reveals that while the headline earnings numbers remain above their starting point at the beginning of the year, Energy and Materials are driving all the strength. As Exhibit 3 shows, earnings expectations are falling in the soon-to-be-reported Q2 and Q3, ex these two sectors.
From here, the key for equities is how deep the cuts to forward earnings get and what is the Fed reaction. Equities are assuming some negative adjustments to earnings already. However, if forward guidance during earnings season is worse than expected, we’re likely to see continued weakness. Potentially offsetting this would be any change in stance by the Fed. If investors start to see cracks in “peak Fed hawkishness” Treasury Yields will start to drop and higher multiples will be applied to future earnings.
Signs Inflation Will Begin to Slow
Along those lines, there are some signs that inflation will begin to slow. As Exhibit 4 shows, the Commodity Research Bureau BLS Spot Raw Industrials Index (which follows the basic materials used in the production of goods) has already dropped nearly 11% from its high through the end of June. Should this continue, it will begin to flow through to finished goods.
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This market commentary was written and produced by Stableford Capital, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
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