U.S. Treasury yields slipped Wednesday as investors continue to assess the economic outlook amid rising recession fears.
At around 5:48 a.m. ET, the yield on the benchmark 10-year Treasury note was down at 3.173%, while the yield on the 30-year Treasury bond dropped to 3.285%. Yields move inversely to prices.
As the second quarter draws to a close on Thursday, concern over a slowing economy and aggressive interest rate hikes from the Federal Reserve continue to dominate market sentiment.
An attempted rally for risk assets fizzled out on Tuesday after a disappointing consumer confidence reading, which came in at 98.7, below Dow Jones’ consensus estimates of 100.
The Conference Board’s one-year ahead inflation expectations hit a record high of 8.0%, exceeding the 7.7% seen in June 2008, while the Richmond Fed’s manufacturing index came in at -19, its lowest since May 2020 and well below consensus expectations of -7.
Fed Chairman Jerome Powell is due to give a speech at the European Central Bank forum at 9 a.m. ET. Powell acknowledged in a testimony to the Senate banking committee last week that steep rate hikes may tip the U.S. economy into recession, but reiterated the central bank’s commitment to reining in inflation.
On the economic data front, final first-quarter GDP figures are due at 8:30 a.m., along with PCE prices, corporate profits and consumer spending data.
Here are the most important news, trends and analysis that investors need to start their trading day:
1. Wall Street heads for its first weekly advance in the past four
A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., June 22, 2022.
Brendan Mcdermid | Reuters
2. Powell vows ‘unconditional’ measures to fight decades-high inflation
Powell testified before the House Committee on Financial Services on monetary policy and the state of the U.S. economy.
Win Mcnamee | Getty Images News | Getty Images
In Day 2 of his semiannual economic testimony on Capitol Hill, Fed Chairman Jerome Powell told the U.S. House of Representatives Financial Services Committee that the central bank’s commitment to reining in 40-year-high inflation is “unconditional.” A day earlier, on Wednesday, Powell told the U.S. Senate Banking Committee that the Fed was not trying to provoke a recession but that one was “certainly a possibility.” Last week, monetary policymakers hiked rates by 75 basis points and signaled another increase of 50 to 75 basis points at their July meeting.
3. FedEx reports mixed quarter results as ground unit margin improved
A driver for an independent contractor to FedEx Corp. carries packages for delivery during Cyber Monday in the Hell’s Kitchen neighborhood of New York, U.S., on Monday, Nov. 29, 2021.
Angus Mordant | Bloomberg | Getty Images
FedEx shares turned lower in Friday’s premarket, the morning after the delivery giant reported better-than-expected fiscal fourth-quarter profit but missed on revenue. Adjusted earnings of $6.87 per share beat estimates by a penny. Revenue grew 8% to $24.4 billion, lower than expectations of $24.56 billion. Shipment volumes declined, but that was offset by increased shipping rates and fuel surcharges. FedEx’s closely watched ground unit margin improved, but it has lagged United Parcel Service, whose new CEO adopted a “better not bigger” mantra two years ago. FedEx issued upbeat guidance for fiscal 2023.
4. Zendesk surges on reports that it’s nearing a deal to sell itself
Zendesk co-founder and CEO Mikkel Svane
Eric Piermont | AFP | Getty Images
Zendesk shares surged more than 50% in the premarket on reports that the customer service software vendor was close to a buyout deal with a group of private equity firms. The Wall Street Journal reported that Hellman & Friedman and Permira are among those involved. The potential buyout comes after Zendesk announced last week that it had ended efforts to sell itself. The San Francisco-based firm has been under pressure from activist investor Jana Partners. The Journal said it’s unclear where Zendesk’s discussions with Jana stand.
5. Bill designed to prevent gun violence is headed for House, then Biden
Demonstrators attend a rally with senators outside the U.S. Capitol to demand the Senate take action on gun safety on Thursday, May 26, 2022, in the wake of the Robb Elementary School shooting in Texas.
Tom Williams | CQ-Roll Call, Inc. | Getty Images
A bipartisan bill designed to prevent gun violence that passed the Senate on Thursday night goes to the House. Speaker Nancy Pelosi promised a vote Friday to send the most sweeping firearms measure in decades to President Joe Biden for his signature. The legislation, which seemed unimaginable a month ago, got 15 Republican votes in the Senate, including Minority Leader Mitch McConnell. The May 24 massacre at a Uvalde, Texas, elementary school galvanized both sides of the aisle to try to prevent this from happening again.
— CNBC’s Peter Schacknow, Jesse Pound,Sarah Min and Tanaya Macheel as well as Reuters and The Associated Press contributed to this report.
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Until inflation peaks and the Federal Reserve stops hiking rates, market forecaster Jim Bianco warns Wall Street is on a one way trip to misery.
“The Fed only has one tool to bring in inflation and that is they have to slow demand,” the Bianco Research president told CNBC “Fast Money” on Tuesday. “We may not like what’s happening, but over in the Eccles building in Washington, I don’t think they’re too upset with what they’ve seen in the stock market for the last few weeks.”
The S&P 500 dropped for the fifth day in a row and tripped deeper into a bear market on Tuesday. The index is now off 23% from its all-time high hit on Jan. 4. The Nasdaq is off 33% and the Dow 18% from their respective record highs.
“We’re in a bad news is good news scenario because you’ve got 390,000 jobs in May,” said Bianco. “They [the Fed] feel like they can make the stock market miserable without creating unemployment.”
Meanwhile, the benchmark 10-year Treasury Note yield hit its highest level since April 2011. It’s now around 3.48%, up 17% over just the past week.
‘Complete mess right now’
“The bond market, and I’ll use a very technical term, it’s a complete mess right now,” he said. “The losses that you’ve seen in the bond market year-to-date are the greatest ever. This is shaping up to be the worst year in bond market history. The mortgage-backed market is no better. Liquidity is terrible.”
Bianco has been bracing for an inflation comeback for two years. On CNBC’s “Trading Nation” in December 2020, he warned inflation would surge to highs not seen in a generation.
“You’ve got quantitative tightening coming. The biggest buyer of bonds is leaving. And, that’s the Federal Reserve,” said Bianco. “You’ve got them intending on being very hawkish in raising rates.”
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Bianco expects the Fed will hike rates by 75 basis points on Wednesday, which falls in line with Wall Street estimates. He’s also forecasting another 75 basis point hike at the next meeting in July.
“You could raise rates enough and you could butcher the economy and you can have demand fall off a cliff and you can have inflation go down. Now, that’s not the way you or I want it to be done,” said Bianco. “There’s a high degree of chance that they’re going to wind up going too far and making a bigger mess of this.”
He contends the Fed needs to see serious damage to the economy to back off its tightening policy. With inflation affecting every corner of the economy, he warns virtually every financial asset is vulnerable to sharp losses. According to Bianco, the odds are against a soft or even a softish landing.
His exception is commodities, which are positioned to beat inflation. However, Bianco warns there are serious risks there, too.
“You’re not there in demand destruction yet. And so, I think that until you do, commodities will continue to go higher,” he said. “But the caveat I would give people about commodities is they’ve got crypto levels of volatility.”
For those with a low tolerance for risks, Bianco believes government-insured money market accounts should start looking more attractive. Based on a 75 basis points hike, he sees them jumping 1.5% within two weeks. The current national average rate is 0.08% on a money market account, according to Bankrate.com’s latest weekly survey of institutions.
It would hardly keep up with inflation. But Bianco sees few alternatives for investors.
“Everything is a one way street in the wrong direction right now,” Bianco said.
U.S. Treasury yields surged Monday morning, led by short-term rates, as traders reacted to hotter-than-expected inflation data last week and contemplated a possible recession.
The 2-year rate jumped more than 10 basis points to 3.1535%, reaching its highest level since 2007. The benchmark 10-year Treasury yield also rose, last trading at about 3.1762%, with the two edging closer to an inversion — which can often signal a recession. Yields move opposite to the price, and a basis point is equal to 0.01%.
Short-term rates have moved more in the last few days because of their higher sensitivity to Federal Reserve rate hikes, flattening the widely watched yield curve.
A highly anticipated Federal Reserve meeting comes this week, with the central bank expected to announce at least a half-point rate hike on Wednesday. The Fed has already raised rates twice this year, including a 50-basis-point (0.5 percentage point) increase in May in an effort to stave off the recent inflation surge.
Last week, the U.S. consumer price index, a closely watched inflation gauge, rose by 8.6% in May on a year-over-year basis, its fastest increase since 1981, the Bureau of Labor Statistics reported Friday. Economists polled by Dow Jones expected a gain of 8.3%. The so-called core CPI, which strips out volatile food and energy prices, rose 6%.
Meanwhile, the University of Michigan consumer sentiment reading fell to a record low, appearing to accelerate the selling in bonds at the end of last week.
There are no major economic data releases due Monday.
— CNBC’s Jesse Pound and Sam Meredith contributed reporting.
1. S&P 500 futures are lower after snapping long losing streak
Traders on the NYSE, May 20, 2022.
Source: NYSE
S&P 500 futures were lower Tuesday morning, as Wall Street resumes trading following the Memorial Day holiday. Stocks posted strong gains last week, ending seven-week losing streaks for the S&P 500 and Nasdaq Composite and an eight-week slide for the Dow Jones Industrial Average. The S&P 500 and Dow rose 6.5% and 6.2%, respectively, their best weekly advances since November 2020. The tech-heavy Nasdaq was the best-performing major U.S. stock index last week, gaining 6.8%.Stocks were aided in the latter part of last week by quality retail earnings and the Federal Reserve’s favorite inflation measure suggested price pressures in April eased somewhat. In this four-day trading week, Salesforce and Hewlett Packard Enterprise headline the earnings calendar, while the May jobs report is due out Friday.
2. Bond prices fall, 10-year yield tops 2.8%
U.S. Treasury yields climbed Tuesday, with the yield on the benchmark 10-year note rising as high as 10 basis points to reach 2.855%. As of 7:20 a.m. ET, the 10-year Treasury note yield stood around 2.812%. Bond yields move inversely to prices. The action in the bond market came as preliminary data for May showed euro zone inflation hitting yet another record high and oil prices rose.
Investors also were digesting comments Monday from Federal Reserve Governor Christopher Waller, who said in a speech he supports the central bank taking interest rates above neutral by the end of this year. The so-called neutral rate is the level at which Fed policy neither restricts nor supports economic growth.
3. Oil rises as EU reaches deal to ban most Russian crude imports
A general view of oil tanks in the Transneft-Kozmino Port near the far eastern town of Nakhodka, Russia.
Yuri Maltsev | Reuters
Crude prices rose Tuesday, as European Union leaders reached a deal late Monday to ban about 90% of Russian oil imports by the end of the year. U.S. benchmark West Texas Intermediate crude futures for July climbed more than 3%, trading as high as $119.43 per barrel. The August contract for international benchmark Brent crude was higher by about 1.65% to $119.54 per barrel. The EU’s latest sanctions package, which still needs to be finalized, is the bloc’s sixth targeting Russia over its invasion of Ukraine in late February. About three-quarters of Russia’s crude imports will be immediately impacted, according to EU estimates, rising to 90% by year-end. A Russian official said Moscow will “find other importers” for its oil in response to the EU’s partial embargo.
4. Shanghai set to ease strict Covid lockdowns
After about two months of lockdown, Shanghai announced plans over the weekend to relax restrictions on business activity. Subway riders pictured here on May 28, 2022, ride on one of four lines in the city that have resumed operations.
Vcg | Visual China Group | Getty Images
Shanghai’s coronavirus lockdown is set to be lifted Wednesday, after two months of restrictions that upended life in China’s most populous city, angering residents and hampering the world’s second-largest economy. According to Reuters, about 22.5 million people who live in low-risk areas will see their strict Covid curbs lifted Wednesday. Although gyms and movie theaters will stay closed for now, stores can operate at 75% of capacity, The Associated Press reported. Full service of public transportation on buses and subways will resume. Shanghai’s lockdown came as part of China’s so-called zero Covid policy.
5. Unilever shares jump as Nelson Peltz to join its board
Here are the most important news, trends and analysis that investors need to start their trading day:
1. Stock futures rise after S&P 500 closes on brink of a bear market
Traders work on the trading floor at the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S., May 19, 2022.
Andrew Kelly | Reuters
U.S. stock futures bounced Friday, one day after continued selling on Wall Street that saw the S&P 500 close on the doorstep of the joining the Nasdaq in a bear market. Those two stock benchmarks were headed for their seventh straight weekly losses. The Dow Jones Industrial Average, which also closed lower Thursday, was poised for its eighth down week in a row. The Dow was locked in a steep correction, as defined by a drop of 10% or more from a prior high. A bear market is signified by a decline of 20% or more from a prior high.
Bond prices, which move inversely to yields, fell Friday as stocks rebounded in the premarket. The 10-year Treasury yield was trading around 2.9%. That’s just under the key 3% level that’s been breached on and off for weeks as traders push yields higher on the belief that the Federal Reserve will have to hike interest rates more aggressively to get inflation under control.
2. China cuts a key rate to try to boost its Covid-hampered economy
High-rise buildings in downtown Shanghai, China, on March 12, 2018. China cut its benchmark reference rate for mortgages by an unexpectedly wide margin on Friday, its second cut this year as Beijing seeks to revive the ailing housing sector to prop up the economy.
Johannes Eisele | Afp | Getty Images
China is going the other way with borrowing costs, cutting its benchmark reference rate for mortgages by an unexpectedly wide margin Friday. That’s the second reduction this year in this key rate as Beijing seeks to revive the country’s ailing housing sector to prop up the world’s second-largest economy. Senior Chinese officials have pledged further measures to fight a slowdown in economic growth due to lockdowns and other restrictive measures under that country’s zero Covid policy. Many private sector economists expect China’s economy to shrink this quarter from a year earlier, compared with first quarter’s 4.8% growth.
3. Ross Stores becomes the latest retailer crushed by inflation
Pedestrians pass in front of a Ross Stores location in San Francisco.
Noah Berger | Bloomberg | Getty Images
Back in the U.S., Ross Stores became the latest retail stock slammed after signaling that inflation was a problem. Shares of the off-price retailer sank 26% in the premarket, following quarterly misses on profit and revenue. In its first-quarter earnings release, out after the closing bell Thursday, Ross Stores also issued downbeat guidance. The company said Russia’s war in Ukraine has “exacerbated inflationary pressures,” adding that it faced tough year-over-year comparisons in the first half of 2022 due to expiring government Covid stimulus and pent-up demand normalizing.
4. CDC recommends a booster of Pfizer’s Covid vaccine for kids 5-11
A healthcare worker administers a Pfizer-BioNTech Covid-19 vaccine to a child at vaccination site in San Francisco, California, U.S., on Monday, Jan. 10, 2022.
David Paul Morris | Bloomberg | Getty Images
The Centers for Disease Control and Prevention is recommending a Pfizer Covid booster shot for kids 5 to 11 at least five months after their primary vaccination series. The CDC’s move Thursday comes as Covid infections are on the rise across the country and immunity from the first two doses wanes. The agency is rolling out boosters for 5- to 11-year-olds even though most children in that age group haven’t received their first two doses yet. Only 29% of that cohort is fully vaccinated. CDC Director Dr. Rochelle Walensky, in a statement Thursday, sought to reassure parents that the shots are safe and encouraged them to get their kids vaccinated.
5. Musk denies ‘wild accusations’ in an apparent reference to a harassment report
SpaceX CEO Elon Musk participates in a postlaunch news conference inside the Press Site auditorium at NASA’s Kennedy Space Center in Florida on May 30, 2020, following the launch of the agency’s SpaceX Demo-2 mission to the International Space Station.
NASA/Kim Shiflett
SpaceX founder and CEO Elon Musk said in a tweet late Thursday that “wild accusations” against him are not true. He did not explain what those accusations were. But his response came after a Business Insider report on Thursday said the aerospace company had paid $250,000 in severance to a flight attendant who accused the billionaire of sexual misconduct. The report, which cited interviews and documents obtained by Insider, said the woman claimed that during a massage she was giving Musk he exposed his erect penis, touched her thigh without her consent and offered to buy her a horse if she performed sex acts. CNBC could not independently verify those allegations.
— CNBC’s Fred Imbert, Sarah Min, Vicky McKeever, Spencer Kimball and Dan Mangan as well as Reuters contributed to this report.
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Here are the most important news, trends and analysis that investors need to start their trading day:
1. Dow futures pop after the 30-stock average’s six-session losing streak
The Twitter logo and trading information is displayed as a trader works on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., May 3, 2022.
Brendan Mcdermid | Reuters
U.S. stock futures bounced Friday, with the S&P 500 trying not to join the Nasdaq in a bear market, which is defined by a drop of 20% or more from a prior high.
Nasdaq futures led the way higher despite an 12% premarket drop in Twitter shares. The stock dropped as much as 25% after Elon Musk tweeted Friday his deal to buy the social network is “temporarily on hold.” Twitter shares were paring those losses when Musk later tweeted he’s “still committed” to the deal.
The Dow Jones Industrial Average on Thursday dropped for the sixth straight session, sinking further into a correction, define by a drop of 10% or more from a prior high. The S&P 500 fell slightly. The Nasdaq managed a slight gain.
2. Bond yields rose after Powell says he can’t guarantee a soft landing
The 10-year Treasury yield on Friday ticked higher but remained under 3%, a key level that was breached on May 2 for the first time since late 2018.
Bonds yields have been rapidly rising on the belief that the Federal Reserve will have to act more aggressively on hiking interest rates to fight inflation. There’s concern that inflation will remain high even as the economy slows down.
Fed Chairman Jerome Powell said in an interview posted Thursday on Marketplace that he can’t promise a so-called soft landing for the economy. He warned that getting inflation under control could cause some economic pain but remains his top priority.
3. Two tweets from Elon Musk about his Twitter deal hit the stock
With two tweets Friday morning, Musk sent Twitter shares on a wild ride. After saying he paused his Twitter offer seeking more information about how many fake accounts there are on the social media platform, he later said he was “still committed to the acquisition.” The first tweet came at 5:44 a.m. ET. The second tweet was posted about two hours later.
The Tesla CEO Musk announced last month that he intends to buy Twitter for $44 billion and he’s previously tweeted that one of his main priorities would be to remove “spam bots” from the platform. Tesla shares, which recently fell on worries about Musk’s Twitter deal being a distraction, rallied more than 5% Friday on the first tweet and held those gains after the second.
4. Some stablecoins get their footing, helping to send the crypto market higher
Tether has long faced questions over whether it has enough assets to justify its peg to the dollar.
Tiffany Hagler | Bloomberg via Getty Images
Tether, the world’s largest stablecoin, regained its peg to the dollar after more than $3 billion worth of tokens left the system in a single day. The cryptocurrency — which is meant to always be worth $1 — sunk as low as 95 cents on Thursday. A controversial stablecoin known as TerraUSD or UST, which is supposed to be pegged 1-to-1 with the dollar, has collapsed in recent days, trading around 8 cents Friday. Luna, a token closely associated with UST, is now worth $0 as a result.
The stablecoin saga has added a layer of uncertainty that’s contributed to sharp declines across the entire crypto market. Bitcoin on Friday was back above $30,000, rebounding from levels not seen since late 2020. At current levels, bitcoin, the world’s largest cryptocurrency, was down more than 50% from its all-time high of over $68,000 in November.
5. CEO of a major crypto exchange takes a big stake in Robinhood
Sam Bankman-Fried, CEO of FTX US Derivatives, testifies during the House Agriculture Committee hearing titled Changing Market Roles: The FTX Proposal and Trends in New Clearinghouse Models, in Longworth Building on Thursday, May 12, 2022.
Tom Williams | CQ-Roll Call, Inc. | Getty Images
Shares of Robinhood, a popular stock and crypto trading platform, jumped more than 23% in Friday’s premarket. In regular trading Thursday the stock hit an all-time low. Robinhood ended the session priced at $8.56, about 77% away from its IPO price last July.
The document said Bankman-Fried does not plan to take “any action toward changing or influencing the control” of the company. The filing also said he may “from time to time engage in discussions” with management.
— CNBC’s Jesse Pound, Vicky McKeever, Jeff Cox, Sam Shead and Tanaya Macheel contributed to this report.
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Here are the most important news, trends and analysis that investors need to start their trading day:
1. Wall Street set to rise after S&P 500 hits lowest level in over a year
Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, March 22, 2022.
Brendan McDermid | Reuters
U.S. stock futures bounced Tuesday, with investors hoping Wall Street can break its three-session losing streak. The S&P 500 on Monday fell to its lowest level in more than a year. The broad market index dropped 3.2%, closing under 4,000. The Nasdaq tumbled nearly 4.3% and the Dow Jones Industrial Average dropped close to 2%. The Nasdaq’s bear market approached a 30% decline from its last record high in November. The S&P 500 and the Dow moved deeper into correction territory, defined by a drop of 10% or more from their most recent record highs, which were in early January.
2. 10-year Treasury yield and U.S. oil prices drop; bitcoin bounces
The brutal selling in the stock market of late has been triggered in large part by the rise in the 10-year Treasury yield, as bond traders bet that the Federal Reserve won’t be able to get inflation under control in a timely fashion. Ahead of two key inflation reports Wednesday and Thursday, President Joe Biden on Tuesday is set to deliver remarks on inflation.
The 10-year yield’s decline from multiyear highs did not seem to help equities Monday. However, the benchmark yield dipped again Tuesday, going below 3%, and stocks advanced in the premarket.
One day after sinking nearly 6.1%, U.S. oil prices dropped another roughly 1.5% on Tuesday but remained over $100 per barrel. Elevated crude prices have been reflected at American gas pumps — and on Tuesday, the national average hit an unadjusted-for-inflation record of $4.37 per gallon, according to AAA.
Bitcoin rose above $31,000 on Tuesday, one day after falling below that level for a more than 50% decline from November’s all-time high. The recent price drops come amid a broader, multiday sell-off that has ensnared much of the crypto market and equities.
3. Peloton plunges after reporting a big loss and weak guidance
Peloton on Tuesday reported a wider-than-expected quarterly loss and a steep decline in sales, as inventory piled up in warehouses and ate away at the company’s cash. Shares of the connected fitness equipment maker plunged more than 20% in premarket trading. Peloton offered up a weak sales outlook for the current quarter, citing softer demand. The company anticipates that planned subscription price hikes may lead some users to cancel their monthly memberships.
4. Migraine drug stock soars; shares of Covid vaccine maker sinks
Pfizer said Tuesday it will buy migraine drug maker Biohaven Pharmaceutical for about $11.6 billion in cash. Pfizer will acquire all the outstanding shares of Biohaven that it doesn’t already own for $148.50 each in cash. That’s 78.6% higher than Biohaven’s closing price Monday, a premium largely reflect in Tuesday’s premarket. In November, Pfizer acquired overseas marketing rights to two migraine drugs from Biohaven for up to $1.24 billion, with Pfizer taking a 2.6% equity stake.
Novavax shares sank over 20% in premarket trading after the vaccine maker missed both top and bottom line estimates for its latest quarter. The miss comes as Novavax shipped just 31 million Covid doses during the quarter, putting it well off the pace of its projected 2 billion shots for 2022. While reiterating its prior 2022 revenue forecast, the company said it expected vaccine sales to accelerate during the current quarter.
5. Tesla halts Shanghai production; Musk ‘aligned’ with EU tech law
Tesla has stopped most of its production at its Shanghai plant due to problems securing parts, according to Reuters, citing an internal memo. It’s the latest in a series of difficulties for the electric vehicle maker’s factory in China’s biggest city, which has been experiencing various levels of lockdowns for more than a month under that country’s zero-Covid policy.
EU industry chief Thierry Breton met Elon Musk in Texas on Monday, and the two signaled agreement on Europe’s digital media regulation ahead of the Tesla CEO’s purchase of Twitter. In a video with Breton, Musk said the spirit of the Digital Services Act “exactly aligned” with his thinking. The two did not go into detail on the law, which levies hefty fines on platforms if they do not control illegal content.
— CNBC’s MacKenzie Sigalos, Lauren Thomas and Pippa Stevens as well as Reuters contributed to this report.
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Here’s a look at other stories impacting the financial advisor business.
“We all understand that markets go through cycles and recession is part of the cycle that we may be facing,” said certified financial planner Elliot Herman, partner at PRW Wealth Management in Quincy, Massachusetts.
However, since no one can predict if and when a downturn will occur, he pushes for clients to be proactive with asset allocations.
Diversify your portfolio
Diversification is critical when preparing for a possible economic recession, said Anthony Watson, a CFP and founder and president of Thrive Retirement Specialists in Dearborn, Michigan.
You can eliminate company-specific risk by opting for funds rather than individual stocks because you’re less likely to feel a company going bankrupt within an exchange-traded fund of 4,000 others, he said.
Value stocks tend to outperform growth stocks going into a recession.
Anthony Watson
Founder and president of Thrive Retirement Specialists
He suggests checking your mix of growth stocks, which are generally expected to provide above-average returns, and value stocks, typically trading for less than the asset is worth.
“Value stocks tend to outperform growth stocks going into a recession,” Watson explained.
International exposure is also important, and many investors default to 100% domestic assets for stock allocations, he added. While the U.S. Federal Reserve is aggressively fighting inflation, strategies from other central banks may trigger other growth trajectories.
Bond allocations
Since market interest rates and bond prices typically move in opposite directions, the Fed’s rate hikes have sunk bond values. The benchmark 10-year Treasury, which rises when bond prices fall, reached 3.1% on Thursday, the highest yield since 2018.
But despite slumping prices, bonds are still a key part of your portfolio, Watson said. If stocks plummet heading into a recession, interest rates may also decrease, allowing bond prices to recover, which can offset stock losses.
“Over time, that negative correlation tends to show itself,” he said. “It’s not necessarily day to day.”
Advisors also consider duration, which measures a bond’s sensitivity to interest rate changes based on the coupon, time to maturity and yield paid through the term. Generally, the longer a bond’s duration, the more likely it may be affected by rising interest rates.
“Higher-yielding bonds with shorter maturities are attractive now, and we have kept our fixed income in this area,” Herman from PRW Wealth Management added.
Cash reserves
Amid high inflation and low savings account yields, it’s become less attractive to hold cash. However, retirees still need a cash buffer to avoid what’s known as the “sequence of returns” risk.
You need to pay attention to when you’re selling assets and taking withdrawals, as it may cause long-term harm to your portfolio. “That is how you fall prey to the negative sequence of returns, which will eat your retirement alive,” Watson said.
However, retirees may avoid tapping their nest egg during periods of deep losses with a significant cash buffer and access to a home equity line of credit, he added.
Of course, the exact amount needed may depend on monthly expenses and other sources of income, such as Social Security or a pension.
From 1945 to 2009, the average recession lasted 11 months, according to the National Bureau of Economic Research, the official documenter of economic cycles. But there’s no guarantee a future downturn won’t be longer.
Cash reserves are also important for investors in the “accumulation phase,” with a longer timeline before retirement, said Catherine Valega, a CFP and wealth consultant at Green Bee Advisory in Winchester, Massachusetts.
I do tend to be more conservative than than many because I have seen three to six months in emergency expenses, and I don’t think that’s enough.
Catherine Valega
Wealth consultant at Green Bee Advisory
“People really need to make sure that they have sufficient emergency savings,” she said, suggesting 12 months to 24 months of expenses in savings to prepare for potential layoffs.
“I do tend to be more conservative than many because I have seen three to six months in emergency expenses, and I don’t think that’s enough.”
With extra savings, there’s more time to strategize your next career move after a job loss, rather than feeling pressure to accept your first job offer to cover the bills.
“If you have enough in liquid emergency savings, you are providing yourself with more options,” she said.
U.S. Federal Reserve Board Chairman Jerome Powell speaks during his re-nominations hearing of the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill, in Washington, U.S., January 11, 2022.
Graeme Jennings | Reuters
The Federal Reserve is widely expected to raise its fed funds target rate by a half-percentage point Wednesday, but investors will be more focused on whether it signals it could get even more aggressive with future rate hikes.
The Fed is also expected to announce the start of a program to wind down its roughly $9 trillion balance sheet by $95 billion a month, starting in June. The 50-basis-point hike would put the fed funds target rate range at 0.75% to 1%.
That fed funds target rate after this week’s hike would be well off zero, but way below the market’s expectations for a funds rate above 2.8% by the end of this year.
The central bank’s communications will be key, given the slowing in some economic data while inflation is still hot. Economic growth contracted by 1.4% in the first quarter, but economists say it was distorted by trade data and they expect second-quarter gross domestic product to bounce back.
“I think they’re going 50 [basis points], and it seems like they’re dead set on hiking rates enough to kill inflation,” said Jim Caron, chief fixed income strategist on the global fixed income team at Morgan Stanley Investment Management. “But that’s the real debate. Are they trying to get to target inflation by 2024? If they are, the wage inflation is pretty high and that will require even more tightening than the Fed is projecting.”
Powell’s comments are front and center
The Fed’s forecast shows it expects core personal consumption expenditures inflation to reach 2.3% by 2024 and move back to the Fed’s 2% target over the longer run. Central bank officials also forecast a fed funds rate of 1.9% for this year and 2.8% for 2023 and 2024 in their March projections. The central tendency in the Fed’s forecast for the funds rate for 2023 was between 2.4% and 3.1%.
The central bank does not release its next quarterly forecast until the June meeting, so much of what the market will hinge on will come from Fed Chairman Jerome Powell. Powell briefs the media following the 2 p.m. ET release of the statement.
The futures market is pricing in a fed funds rate of 2.82% by the end of this year, which would take roughly 2.5 percentage points of hiking in 2022. Traders are betting on a 50-basis-point hike this week, as well as close to 50 or more for each of the next three meetings in June, July and September.
St. Louis Federal Reserve
“The cross winds are so tough. I think the fundamental question is clear. It’s just how quickly inflation comes down or does the Fed accelerate tightening in the next four to five months?” said Wells Fargo’s Michael Schumacher.
Consumer price inflation jumped 8.5% in March. While economists say inflation could be peaking, how quickly it drops will be the key to the Fed’s rate path.
“The Fed will have to look at the situation and say inflation is off, it’s falling. Is it falling rapidly enough?” Schumacher said.
“A lot of policy makers say they want to get to neutral by the end of this year — 2.50% plus, and the market is priced for the Fed to be above neutral — 3.30% by the middle of next year. That’s too low I think. There’s a lot of people out there saying fed funds have to go much higher,” he added.
Fed’s next steps become the focal point
Strategists say the markets are bracing for a hawkish Fed. However, if the central bank delivers what is expected without emphasizing more aggressive hiking, it could be perceived as dovish. That means bond yields, which move opposite price, could come down after the meeting and stocks could move higher.
“What the market is really going to care about is the outlook for hikes and particularly the possibility of 75 basis points,” said Mark Cabana, head of U.S. rates strategy at Bank of America. Traders have been speculating the Fed could up the ante with an even bigger rate hike at the June meeting.
JPMorgan’s economists said there is a 1 in 5 chance of the Fed raising rates by 75 basis points this week, though the market is not pricing in that possibility.
While the Fed is not expected to provide much clarity about the pace of its hiking, Powell could be asked about it during his briefing.
“He is not going to support or dismiss the idea of 75,” said Cabana. The chairman is likely to follow the script from the last meeting, when the Fed raised rates by a quarter point. That was the first hike since 2018.
“We think he is going to try to be as noncommittal as possible, similar to how he sounded last time,” Cabana said.
Communicating intention
Rick Rieder, BlackRock’s chief investment officer of global fixed income, said he expects the Fed to raise rates by a half-percentage point Wednesday, but at some point in the future the central bank could speed up its hiking if it felt the need to get to neutral faster.
If the Fed clearly communicated its intention, the markets could take quicker tightening in stride. “They could accelerate the pace and go faster, and then they could pivot,” he said.
Since the last meeting, the outlook for the economy has deteriorated and markets have thrown a tantrum. Fed officials have been far more outspoken about their determination to fight inflation with rate hikes, and that has injected more fear of an economic downturn into markets.
Rieder said he does not foresee a recession this year because the economy is too strong. “I don’t think we’re going into any near-term recession. The data is still solid,” he said. But Rieder added that it is slowing, and there could be a recession in 2023. “I think any recession we see in the next couple of years is going to be shallow unless there’s an exogenous shock.”
The S&P 500 was down 8.8% in the month of April, while bond yields have shot higher. The 10-year Treasury yield hit a high above 3% this week, while it was at 1.66% in the week going into the last Fed meeting in March. The 10-year was at 2.95% Tuesday.
Strategists do not expect the Fed to be concerned about either the stock market’s sell-off or the run up in bond yields. “They want to be tightening financial conditions. That’s part of the story,” said Cabana. He expects Powell to say tightening was not unexpected.
“He will say the economy is still strong, and the Fed getting prices back in check is paramount,” said Cabana. Powell is also likely to press that the Fed sees a soft landing for the economy, though the market will remain skeptical, he added.