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Weekly Commentary

Weekly Commentary (5/16/22): – Are We At The Peak?

Equity markets continued their poor performance last week despite a strong rally on Friday.  Last week’s Consumer Price Index (CPI) and Producer Price Index (PPI) confirmed inflationary pressures that investors continue to grapple with. While the Fed tries to navigate the “soft landing” with its recent shift in monetary policy, to combat inflation, investors have become increasingly concerned that the Fed has become too aggressive which could tip the economy into a recession.

For the week, the DJIA declined 2.08%, while the S&P 500 dropped 2.35%. The tech-heavy Nasdaq finished 2.77% lower. International markets were also lower, with the MSCI EAFE Index down 1.37% while emerging market equities (MSCI EM) gave back 2.60%. Small company stocks, represented by the Russell 2000, declined 2.50%. On a positive note, fixed income, represented by the Bloomberg/Barclays Aggregate recovered 0.89% for the week. The 10 YR US Treasury yield touched a multi-year high of 3.20% before closing the week at a yield of 2.93%. Gold prices ($1,812/oz.) have been under pressure lately due to a strengthening dollar ($). Oil prices were up modestly on the week closing at $110.49 per barrel.

The CPI eased to 8.3% year-over-year (y/y) which was slightly less than last month’s release of 8.5% y/y. The month-over-month (m/m) increase came in at 0.3%, slightly above expectations of 0.2%.  When stripping out volatile components of food and energy, consumer core prices rose by 6.2%. April producer prices also rolled over from peak levels with the headline number showing an 11% increase over the last year. PPI increased 0.5% m/m, which was the smallest monthly gain in over seven months. We have likely reached peak inflation; however, it should remain elevated in the near-term as higher energy prices and supply chain issues remain. This week, there will be economic reports released on industrial production, new and existing home sales, retail sales, and leading indicators.

Some investors are already pricing in a recession for 2022 or early 2023. In our view, equity and bond markets are exhibiting signs that traditionally point to a bottoming process (maximum pessimism and low sentiment, hedge fund liquidations, lack of reaction to positive news, etc…). With inflation and rate trends driving pessimism in stocks and bonds alike, signs of moderating inflation could enable both asset classes to rally on the realization that investors have priced in too much fear about inflation, stagflation, and recession. Diversification, patience, and a bias towards quality will continue to help investors manage through this challenging period.

“Despite the forecast live like it’s spring” – Lilly Pulitzer

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