Tuesday, June 7, 2022
U.S. and International Equities
The major market indexes finished the month mixed but did snap a seven consecutive week of losses during the last week of May. The market had suffered its longest such streak in over ten years as the S&P 500 Index neared bear market territory with an over 17% decline for the year as of May 20th. Investors remain concerned about inflation’s potential impact to the economy, the aggressiveness of the path of upcoming Federal Reserve rate hikes, slowing corporate profit growth, and pockets of still elevated stock valuations. Disappointing earnings reports from several major retailers reaffirmed market participant concerns.
Energy led all sectors for May, handily rebounding from April’s pullback. The sector’s fundamental case continues to improve due to global demand outside of China, fears of drawn-out supply disruptions from the Russia-Ukraine conflict, and European sanctions. Utilities had a strong month as the market maintained the view that steady demand along with the ability to pass along inflationary costs could help the future fundamentals for the sector.
Both oil and natural gas finished May in the green, as energy continued its dominating run in 2022. Natural gas is well up over 100% for the year as we head into the summer, when demand is normally moderately higher than the spring. The major metals, gold, silver, and copper, lost ground for the second straight month even amid inflationary conditions.
Fixed Income Continues Lower
The Bloomberg Aggregate Bond Index finished higher in May, reversing course thus far in 2022. Bond investors are now anticipating softer economic conditions given the Fed’s hawkish stance on monetary policy. High-yield corporate bonds, as tracked by the Bloomberg High Yield index, finished fractionally higher, overturning their downward trajectory that has prevailed year-to-date. High yield bonds (Bloomberg High Yield Index), which were a bright spot in the fixed income space during 2021, have been negatively impacted by expected higher interest rates and their sensitively to equity market declines. LPL Research’s base case is still that credit conditions remain generally benign.
Developed international bonds (Citigroup World Government Bond Index) lost ground for May while emerging market debt (JP Morgan Emerging Markets Global Bond Index) gained during the month but are still down heavily year-to-date.
U.S. Economic Data Recap
Inflation: April inflation increased marginally higher than analysts expected. Consumer prices in April rose 0.3% from a month ago as well as over 8% from a year ago. In addition, prices in some of the service sectors spiked. This being said, overall we believe that inflation has likely peaked, as base effects pushed the year-over-year metrics down in April relative to March.
April producer prices accelerated higher and rose 0.5% for the month which was up over 10% from April 2021. This was a decrease from the record 11.5% in March. Core producer prices, excluding food, energy, and trade services, rose 0.6% in April and just under 7% from April 2021, a decline from the March reading.
U.S. consumer: May’s Consumer Confidence pulled back more than expected from April. Consumer confidence dropped to a new 11-year low in May, well below economists’ expectations. Inflation remains a forefront concern on investor’s minds. For the third straight month, Consumers expect prices to rise over 5% over 2023. In addition, consumers’ view of their financial situation is also at the lowest level in nine years.
Retail sales: April retail sales came in just below economists’ expectations but removing automobile sales, sales increased more than expected. Miscellaneous retail and online sales were major drivers of last month’s results. On a year-over-year basis, sales were up over 8% on the headline number, and just under 11% excluding autos. That being said, retail sales are not adjusted for inflation so the real values are much lower on an adjusted basis.
U.S. home sales: April home sales declined over 16% from March. This widely missed economists’ expectations and was the slowest pace since the beginning of the pandemic. The median price of a new home sold in April was over $450,000, which represents an increase of nearly 20% from the year before. Rising home values, inflation, as well as higher mortgage rates, are the major culprits to the decline in last month’s home sale results.
Small business sentiment: The National Federation of Independent Business (NFIB) April Small Business Index continue to show that many of the same challenges that have affected small businesses for over a year have not dissipated. Both inflation as well as labor shortages continue to weigh heavily on short-term expectations. Almost 50% of small business owners are reporting job openings that cannot be filled. Roughly one third of businesses across the country are increasing capital expenditures, a positive sign for economic growth later this year.
Federal Reserve news: The Fed’s Federal Open Market Committee (FOMC) meeting this month raised short-term interest rates by 0.50% as expected. In addition, the FOMC announced that balance sheet normalization would begin June 1 with reinvestment caps at $47.5 billion for three months until fully reducing Treasury and mortgage securities by $95 billion per month from September onwards. Moreover, Fed Chairman Powell reiterated that he believes a 0.75% rate hike would be off the table, as some investors were starting to expect this at the next Fed meeting in June.
U.S. employment: May employment increased by just under 400,000, driven by strong gains in leisure and hospitality, professional and business services, along with transportation and warehousing. The labor market is extremely tight as the unemployment rate remains stubbornly low at 3.6%. This rate has remained unchanged for the third consecutive month.
As we continue through the economic recovery, geopolitical conflict in Eastern Europe along with the aftermath of the COVID-19 lockdowns in China investors are concerned about the global economic landscape. As the lockdowns in China subside, this should help improve the global supply chain landscape and eventually supply side driven inflation. Q1 earning season reports show inflation is proving to be a big challenge for corporate America (and beyond); playing a role in both consumer’s purchasing power as well as negatively impacting corporate earnings.
Market participants are presently weighing the effects of all these factors, with this uncertainty leading to higher volatility in financial assets. Our base case continues to be that inflation should begin to stabilize once supply chains move back towards their pre-COVID-19 operational capacities. In addition, in our view, the fairly robust financial health of the consumer and how this affects the consumer’s ability to weather inflation, should continue to be an important driver for the economy for the rest of 2022.
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