Market Watch: June 17, 2022

By Monday’s close, the Dow plunged 875 points, while the S&P 500 and Nasdaq dropped 151 and 531, respectively. In Canada, the TSX fell back into correction territory, losing 532 points, as energy and materials weighed heavily on the index.

Trading on Tuesday was fairly mixed, with the Dow, S&P 500 and TSX registering modest losses, while the Nasdaq gained 19 points. Meanwhile, the sharp selloff in government bonds continued in both the U.S. and Canada. On Tuesday, U.S. 10-year Treasuries reached 3.482% (its highest close since Spring 2011), while Canadian 10-Year notes hit 3.638%.

As predicted by many analysts, the Fed on Wednesday raised interest rates by 75 basis points, the largest increase since 1994. In a news conference following the announcement, Fed Chair Powell said that another significant hike – either 50 or 75 basis points — seemed likely in July.

U.S. indexes responded positively to the news, staging a modest rally, with 10 of the S&P 500’s 11 sectors ending higher. Key tech names, which have been battered this year, registered solid gains as the Nasdaq jumped 271 points. In Canada, the TSX climbed 63 points, as falling oil prices tempered Wednesday’s gains. In the U.S., government bonds rallied Wednesday as 10-Year Treasuries fell 10 basis points.

Wednesday’s positive sentiment vanished Thursday, however, as investors digested the long-term impact of aggressive rate hikes and the growing likelihood of a not-so-soft landing (i.e., recession). By Thursday’s close, the Dow finished below 30,000 after dropping 741 points, while the Nasdaq lost 607 points, and the S&P 500 fell 123. So far this year, the Dow is down 18%, while the S&P 500 and Nasdaq have dropped 23% and 32%, respectively. The TSX also fell sharply, down 607 points to 19,004, a 14-month low.

North American Markets Record Sharp Losses

For the four trading days covered in this report, the Dow lost 1,466 points to close at 29,927, the S&P 500 dropped 234 points to settle at 3,667, while the tech-heavy Nasdaq sunk 694 points to close at 10,646. In Canada, the TSX lost 1,271 points to end at 19,004.

Strategy

The U.S. Federal Reserve (the Fed) hikes interest rates by 75bps and signals more tightening in the months ahead

In its meeting on Wednesday, the Fed raised interest rates by 75bps, the largest increase since 1994 as it intensifies its fight against the strongest price pressures seen in four decades. Along with the rate increase, the Fed also released an updated Summary of Economic Projections and Dot Plot, with the latter showing the target rate reaching 3.4% by the end of this year (1.9% estimated in March) and 3.8% by the end of 2023 (2.8% in March), before settling down to 2.5% long-term (2.4% in March). Markets are expecting another ~200bps of rate increases by year-end, which would take the target rate as high as 3.75% by December. Indeed, in its statement, the FOMC stood firm on its commitment to bringing inflation back down towards the 2% objective and Chairman Jerome Powell reaffirmed this sharp focus on prices during his post-meeting remarks. He also said that another 50-75 bps move at the upcoming July meeting is likely. In addition, the Fed reiterated that it will shrink its balance sheet by US$47.5 billion per month starting this month before doubling that pace from September.

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by Scotia Wealth Management - The Zukiwsky Group

Market Watch: June 17, 2022

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