We continue to share our observations with you. We hope you find them relevant in understanding the current investment climate.

So far, 2022 has been a rough year for the stock and bond markets. As the year began, the Federal Reserve started raising its short-term interest rate to fight rapidly rising inflation. Currently, the Fed’s target rate is 2.25% to 2.5%. This is up from an unprecedented rate of near zero from last year. The yield on the 10-year Treasury bond (a key rate for consumer loans) concurrently rose this year from 1.63% to a high of 3.48% on June 14th. This of course hit the markets hard. Some long-term bond mutual funds were down over 20% and many growth stock mutual funds were down 30% or more.

However, while the Federal Reserve has indicted more hikes are coming, the interest rate on the 10-year Treasury bond has dropped to 2.64% on July29th. Bond prices responded by regaining some of their year-to-date losses. Stocks markets also rallied strongly. The Dow Jones Industrial average rose 10% or more off of the June low with the NASDAQ Composite showing even larger gains.

Unfortunately, inflation is still running hot while GNP has declined slightly for the last 2 quarters. Clearly, the economy does not need higher interest rates, but inflation cannot be allowed to take hold. As I wrote in April’s Chartbook, despite current interest rates still being below the inflation rate, further interest rate increases may not be necessary when GNP is not growing. As previously noted, some factors currently pushing inflation higher may be temporary such as oil prices declining off their peak, and supply chain bottlenecks easing.

-Cliff Jarvis