- Recession fears overtook the S&P 500 a day after the Fed meeting, reversing gains seen midweek.
- The S&P 500 has been higher only 43.5% of all trading days in 2022, a gloomy marker, according to Bespoke Investment Group.
- Meanwhile, it said the Fed is facing a "policy error" in focusing on headline inflation that's swayed by high gas prices.
This year's dismal performance in US equities worsened this week as a post-Fed rally fizzled and investors cemented the S&P 500 to one of its shabbiest mid-year showings in decades, all taking place with poor economic data piling up.
That was the finding from Bespoke Investment Group in a note published Thursday about the "one-step forward and two-steps backward market" investors are experiencing this year. The S&P 500 sank deeper into a bear market with its daily loss of 3.3% a day after the Federal Reserve announced it would raise interest rates 75 basis points. None of the index's 11 sectors moved higher and the energy group led losses as it slumped almost 6%.
The fall on Thursday left the S&P 500 higher only 43.5% of all trading days in 2022.
"While that may not sound all that extreme, in the post-WWII period, there have only been seven other years where the percentage of up days in the first half of the year was lower," said the independent investment firm.
The only two years where the percentage was lower than 40% in the first half of a year were 1962 and 1970.
The downbeat milestone comes as investors flee so-called risk assets as the Fed ramps up interest rates in a bid to tame hot inflation. Inflation in the world's largest economy stepped up to 8.6% in May, a 41-year high, fronted by a nearly 4% jump in energy prices.
Stocks climbed Wednesday after Fed Chair Jerome Powell said the size of its latest interest rate hike — 75 basis points — shouldn't be common during this cycle as the Fed continues to battle inflation. The Federal Open Market Committee projected its fed funds rate will sit at 3.4% by year's end. It currently stands at a range of 1.5% to 1.75%.
But the next day, investors sent stocks tumbling, fearing that the fast pace of large rate increases will push the economy into a recession.
"Making matters worse, economic data this morning was very weak as Housing Starts, Building Permits, Philly Fed, Initial Jobless Claims, and Continuing Jobless Claims all came in weaker than economic forecasts," said Bespoke.
It noted housing starts dropped 14.4% in May, with the Commerce Department's report arriving a day after the Fed lowered its economic growth forecasts and raised its forecast for the unemployment rate. Monetary policy makers now expects gross domestic product in 2022 to grow by 1.7%, down from the previous 2.8% forecast.
"Given all the weakness, it seems unbelievable that it has all come with the largest rate hike in nearly 30 years and promises of more to come in upcoming meetings," the firm said. "No one said coming out of COVID and all the stimulus programs would be easy, but they didn't have 2022 in mind either."
'Policy error'
In a separate note, Bespoke said Powell indicated the central bank will pivot from focusing on core inflation to emphasizing consumer inflation expectations and the rate of headline inflation. Quantitatively both of those figures are driven overwhelmingly by gasoline prices at the pump, the firm said.
Gas prices have topped $5 a gallon on average in the US for the first time ever, AAA said this week.
"It's obvious that the only way the FOMC can effect change on gas prices is to suppress economic activity broadly, and that is the message from the presser: that they will continue hiking aggressively until headline inflation (gas prices) start to drop," Bespoke said.
"This sets the stage for a policy error and it is consistent with the Summary of Economic Projections that aggregates FOMC economic forecasts," it said.