Equity Market Outlook: May 2022

Equity Market Outlook: May 2022

May 06, 2022
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Yesterday I visited the LPL Home Office and heard from Chief Equity Strategist, Quincy Krosby on her thoughts from the recent Fed meeting, inflation, and what lies ahead for the equity markets. Here are a few key takeaways as we head into the weekend.

  •  40% to 50% of daily market trading volume is High-Frequency Trading (HFT). Oftentimes the market responds to news before we even know about it due to this algorithmic trading.

What is High-Frequency Trading?

High-frequency trading, also known as HFT, is a method of trading that uses powerful computer programs to transact a large number of orders in fractions of a second. It uses complex algorithms to analyze multiple markets and execute orders based on market conditions. Typically, the traders with the fastest execution speeds are more profitable than traders with slower execution speeds.1

  • In its meeting two days ago, the Federal Reserve raised its benchmark interest rate by 50 bps (half a percent) which immediately moved the market. Announcing a rate increase of 50 bps for two meetings (instead of 75 bps) is an indication that inflation is beginning to inch down. The Fed's goal is to slow down demand and avoid a recession.

“Inflation is much too high and we understand the hardship it is causing. We’re moving expeditiously to bring it back down,” Fed Chairman Jerome Powell said during a news conference, which he opened with an unusual direct address to “the American people.” He noted the burden of inflation on lower-income people, saying, “we’re strongly committed to restoring price stability.”2

Did You Know?

70% of income from low wage earners is needed to cover necessities compared to 30% of income needed to cover necessities for high wage earners.

  • Corporate America is flush with cash and in good shape. Companies need workers right now but because the U.S. is close to full employment rate, will have to pay more in wages to fill open positions. To compensate, companies will have to pass on higher costs to the consumer, raising prices. This is a core driver of inflation.
  • Americans have cash from an increase in personal savings rates, full employment, and COVID-era government cash payments.

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1. https://www.investopedia.com/terms/h/high-frequency-trading.asp

2. https://www.cnbc.com/2022/05/04/fed-raises-rates-by-half-a-percentage-point-the-biggest-hike-in-two-decades-to-fight-inflation.html