Although the labor market remained strong throughout the first two quarters of 2022, rising inflation – and monetary tightening policies by the Federal Reserve (Fed) – continued to drive down stock and bond prices throughout the 2nd quarter.
The S&P 500® Index ended the quarter down 16.45% – and was down about 20% through the first two quarters – while the bond market experienced its worst quarterly performance in years, with the Bloomberg Aggregate Bond Index (which tracks the high-grade bond market) declining 10.35% year to date. The Fed raised rates 0.25% in March, 0.5% in May, and 0.75% in June – the largest single rate hike since 1994.
The Fed’s monetary tightening policy is intended to combat rising inflation. The Consumer Price Index (CPI), which is a commonly cited index used to gauge inflation, was up 8.6% through the 12-month period through May 2022. Excluding food and energy, the index rose 6.0% during that period. The food index was up 10.1% and the energy prices were up a whopping 34.6% during that 12-month period.
On the bright side, employment growth continued to surge in the 2nd quarter, as employers added about 1.2 million new jobs, including an expectedly high 372,000 new jobs in June. The unemployment rate remained at 3.6%, which is near a 52-year low. Despite recession fears, job growth could remain strong going forward because there are still about 11.3 million job openings in the U.S., according to a July 6 Fed Economic Data report.
With more Americans returning to work, personal income has continued to increase each month since February, with income increasing by 0.5% in both April and May, according to the Bureau of Economic Analysis. Disposable personal income also increased by 0.5% in April and May.
Personal consumption expenditures have also been rising in the 2nd quarter, up 0.6% in April and 0.2% in May. However, when adjusting for inflation, personal consumption expenditures were up only 0.3% in April and down 0.4% in May. The personal savings rate as a percentage of disposable income was up 5.4% in May.
Manufacturing has also remained solid, with economic activity in the manufacturing sector improving in June for the 25th straight month, according to the Institute for Supply Management (ISM). While there were signs of a softening in demand – and continued supply chain issues – 15 of the 18 industries tracked by ISM reported growth for the month.
U.S. stocks hammered in 2nd quarter
The S&P 500 Index dropped 16.45% in the 2nd quarter– including an 8.39% decline in June – from 4,530.41 at the end of March to 3,785.38 at the June close. The total return of the S&P 500, including dividends, was down 16.10% for the quarter and down 8.25% in June. Year to date, the total return was a negative 19.96%. (The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks.)
The NASDAQ Index fared even worse, down 22.44% in the 2nd quarter, from 14,220.52 at the March close to 11,028.74 at the end of June. Year to date, the NASDAQ was down 29.51%. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)