It was another wild week for investors as the stock markets continued to process new information that, ultimately, moved valuations lower over the week. The Federal Open Markets Committee (FOMC) met and announced a rate hike of 75 basis points. While this move was 25 bps more than previously forecast, it was not really a surprise to markets as the general consensus was a 75bps increase, with some calling for a 100bps move. Initially, the market was slightly lower on the announcement but immediately rallied when Chairman Jerome Powell provided more color in his press conference. The following day, equities moved sharply lower, overcoming the gains of the rally, and then moving even further south. To say investors are confused and uncertain is an understatement.
For the week, the DJIA fell 4.73% and the S&P 500 dropped 5.75%. The tech-heavy Nasdaq slid 4.78%. International markets were also down. For the week, the MSCI EAFE Index (developed international) finished lower by 5.73% and emerging market equities (MSCI EM) dropped 4.65%. Small company stocks, represented by the Russell 2000, were down sharply (-7.43%) for the week. The 10 YR US Treasury closed at a yield of 3.25% (up 10 bps over the week).and as a result, fixed income, represented by the Bloomberg/Barclays Aggregate, fell 0.92% as yields moved higher. Gold prices finished at $1,842.60/oz – up 0.6% on the week. Oil prices retreated to $109.56 per barrel, down 9.21% on the week but still up 45.67% year-to-date.
The FOMC were not the only bankers “hiking” rates last week. Switzerland, while known for hiking (no pun intended), has not raised rates since 2007, but they did last week. The Bank of England joined in as well. However, Japan is sticking with zero rates on fears of shrinking their economy and China has pledged to step up policy support for their slowing economy. US banks moved the Prime Rate to 4.75 from 4.00. Global investors seeking yield are bidding up the U.S. Dollar (USD) and better USD exchange rates are benefiting holders of USD.
Looking ahead, existing home sales numbers are announced on Tuesday and new home sales on Friday. Initial jobless claims come Thursday, and U. Michigan consumer sentiment is released on Friday. That indicator is showing very high levels of pessimism and is a factor to watch during this period where the markets are showing great emotional influences.
Crypto “currency” is a great example of prices moving based on emotions and not valuations. Last week was a tough week for all in “crypto land”. We are highly skeptical about these “assets”. We have yet to be convinced of an investment thesis that makes sense to us and continue to consider this territory as speculative. The problem for speculators is when the interest in their domain evaporates, if there is no intrinsic value, prices can go to $0 and stay there.
The Fed will continue to hike the overnight borrowing rate higher until inflation is tamed. How the rest of the market interest rates settle out is a great unknown and forecasting future earnings is more difficult than usual with both high inflation and recession concerns looming. Taken together, these factors make confidently valuing equity securities more challenging than usual, and this is a major part of the reasons we are seeing such wild volatility.
We recommend patience and perseverance in this tumultuous period. We are sanguine on the US economy and equities in the long run and therefore we are not letting the near-term valuations distract us from the longer-term thesis.
“Everyone wants to live on top of the mountain, but all the happiness and growth occurs while you are climbing it.” – Andy Rooney
Equity and fixed income markets continued to struggle in the face of rising inflation. Last week’s Consumer Price Index (CPI) confirmed inflationary pressures that investors continue to grapple with. The CPI rose to 8.6% year-over-year (y/y) in May, overtaking the peak of 8.5% two months ago, and marking its highest reading since 1981. The month-over-month (m/m) increase came in at 1.0%, above expectations of 0.7%. When stripping out volatile components of food and energy, consumer core prices rose by 6.0% which was a slight deceleration from the previous month.
For the week, the DJIA declined 5.04%, while the S&P 500 dropped 4.56%. The tech-heavy Nasdaq finished 5.59% lower. International markets were also lower, with the MSCI EAFE Index down 4.64% while emerging market equities (MSCI EM) gave back 0.52%. Small company stocks, represented by the Russell 2000, declined 4.37%. The fixed income markets also came under pressure largely in response to the higher-than-expected CPI report on Friday. The Bloomberg/Barclays Aggregate declined 1.52% for the week. The 10 YR US Treasury yield jumped back to 3.20%. Gold was a bright spot increasing 1.42% on the week. Oil prices were also up modestly on the week closing at $120.67 per barrel.
In other economic news, jobless claims for the week rose slightly to 229k … this bears watching but weekly claims under 300k is considered a healthy jobs market. Consumer sentiment, as measured by the University of Michigan Consumer Sentiment Index, declined to 50.2% which is a record low. Sticker shock at the pump and grocery stores may be starting to impact consumer behavior and confidence. Consumer expectations had its worst reading since 1980 … another high inflationary environment. This week, there will be economic reports released on industrial production, new and existing home sales, and retail sales.
All eyes will be on the results of the Federal Reserve meeting on Wednesday when it announces how much it will raise short-term rates, as well as on Chairman Powell’s press conference. It’s clear that the Fed will raise the federal funds rate by a least 50bps each at the next two meetings. Their policy outlook for the second half 2022/23 is where things become pretty grey. Last week’s CPI showed that inflation has not yet started to moderate so commentary from the Fed will be closely watched.
Some investors are already pricing in a recession for 2022 or early 2023. Current valuations are already showing rough seas ahead, and we think that will be the case until inflation shows signs of moderating. 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, capitulations, etc…). As always, diversification, patience, and a bias towards quality will continue to help investors navigate through this challenging period.
“(Investing) is the age-old, never-ending emotional battle between fear of the future and faith in the future.” – Nick Murray
After rising over 6% the previous week, markets gave back some ground last week as investors continue to be cautious about the economic outlook. Comments from a few high-profile CEOs sounded alarm bells on the economy – Jamie Dimon from JP Morgan warned investors to prepare for an economic ‘hurricane’ while several other CEOs reduced earnings expectations citing foreign currency headwinds.
For the week, the DJIA lost 0.83% while the S&P 500 dropped 1.15%. The tech-heavy Nasdaq gave back 0.95%. International markets were mixed. For the week, the MSCI EAFE Index (developed international) finished lower by 0.27% while emerging market equities (MSCI EM) gained 1.78%. Small company stocks, represented by the Russell 2000, were slightly negative at -0.22% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, fell 0.88% as yields moved higher. As a result, the 10 YR US Treasury closed at a yield of 2.93% (up 19 bps from the previous week’s closing yield of ~2.74%). Gold prices closed at $1,845.40/oz – down 0.32% on the week. Oil prices continued their march higher to close at $118.87 per barrel, up 3.30% on the week and 58.05% year-to-date.
Economic news released last week was mostly supportive of a slowly growing economy rather than an economy headed for an imminent recession. May’s ISM Manufacturing Index increased to 56.1% from April’s 55.4% level with gains in new order activity. On the other hand, the Non-Manufacturing ISM Index dropped to 55.9% from 57.1% in April and below estimates of 56.4%. Consumer confidence numbers were better than expected at 106.4 (expectations were for a level of 103.7). On the jobs front, 390,000 non-farm jobs were created in May, much better than expected. Unemployment held steady at a low 3.6%.
The week ahead for economic data is rather light. Most interesting this week will be April’s read on consumer credit and May’s Consumer Price Index (CPI). May’s CPI is expected to rise 8% on a year-over-year basis with a core reading of 5.9%. No doubt, cost pressures will continue to impact consumers and businesses alike, but markets have already discounted a fair amount of uncertainty.
We suspect that markets will continue their roller coaster ride until the economic outlook becomes clearer. We continue to suggest that investors stay close to their long-term target asset allocations with a slight defensive bias. The weather is improving – enjoy the summer!
“The secret of getting ahead is getting started.” – Mark Twain
Weekly Commentary (6/27/22) – Stocks Break Out
June 27, 2022
Wall Street finished the holiday shortened week with a bang as inflation showed signs of peaking, tempering investors’ fears of aggressive Federal Reserve interest rate hikes.
The S&P 500 gained 6.5% this past week, while the Nasdaq rose 7.5% and the Dow Jones Industrial Average advanced 5.4%. International equities also finished higher with developed markets (EAFE) and emerging markets (EM) up 2.8% and 0.8%, respectively. The yield on the 10-year U.S. Treasury slid to 3.13% from 3.25% from the previous week.
U.S. consumer sentiment declined to a record low in June, while inflation data pointed to slowing business activity in June. The Refinitiv/Core Commodity Index also came in at a two-month low. The S&P 500 Bank Index rose 3.7% after the major banks passed the Fed’s annual stress test, showing that they have enough capital to weather a recession. On Thursday, Jerome Powell, the Fed chair, stressed: “I don’t think a recession is inevitable.”
The price of oil came down with U.S. crude declining 0.4 % to $107.62 per barrel and is down nearly 8% this month. Housing showed signs of moderating as home sales rose unexpectedly last month, but the trend has been mostly lower as mortgage rates continue to climb.
With inflation remaining stubbornly high, affecting consumers’ pocketbooks, market volatility will continue. The Personal Consumption and Expenditures Index, the Fed’s preferred gauge for tracking inflation, will be announced on Thursday.
“To buy when others are despondently selling and to sell when others are avidly buying requires great fortitude.” –Sir John Templeton