The Week in Review 5/2/22

“I am still learning.”
–Michelangelo

Good Morning ,

April was not kind to investors… not only did we have to pay our taxes we saw our portfolios recede, again.

Last week was another tough week for the stock market, putting a close to an even worse month. The S&P 500 fell 3.3% this week, which was slightly better than the almost 4% declines in the Nasdaq Composite (-3.9%) and Russell 2000 (-3.9%). The Dow Jones Industrial Average fell 2.5%.

Aside from brief spurts of short-covering activity, earnings relief bids, and mechanically-oriented buying, the market remained pressured by concerns about the Fed aggressively tightening policy in a low growth, high inflation environment. 

With all the pessimism in the market it makes sense to find some real perspective… on May 3^rd, one year ago, the S&P 500 closed at 4185. Friday we closed at 4131… a paltry difference of only -54 points.

The violent swings bring out our anxiety, but the markets have done little more than be violently volatile for the last year… and earnings have been robust. Markets fear what they don’t know… and we have some significant unknowns, so we have significant volatility.

The Advance GDP report had the hallmarks of stagflation, although unemployment levels remain historical low: real GDP decreased at an annual rate of 1.4% in the first quarter (consensus +1.1%) while the GDP Chain Deflator increased by a larger-than-expected 8.0% (consensus +7.3%).

Pricing pressures were further exacerbated by the following events:

• Apple warned of higher costs associated with supply chain issues for fiscal Q3;Amazon.com guided Q2 operating income (and revenue) below expectations
• The PCE (Personal Consumption Expenditures) Price Index surged 0.9% month-over-month, which took the year-over-year rate to 6.6% from 6.3% in February
• The Q1 Employment Cost Index increased 1.4% (consensus 1.1%)
• WTI crude futures rebounded above $105.00 per barrel ($105.03, +3.03, +3.0%)

Risk sentiment was further pressured by the mixed state of earnings when considering the results, guidance, and reactions. Meta Platforms stood out among the mega-cap earnings, rising 9% this week on better-than-feared results, but other stocks like Teladoc continued to get crushed on disappointing news.

The markets seem to ignore good to great earnings and focus on guidance… and with all the unknowns, guidance has been mostly cautious. 

Treasury yields ended the week slightly lower amid an uptick in demand. The 2-yr yield decreased three basis points to 2.69%, and the 10-yr yield decreased two basis points to 2.89%. The U.S. Dollar Index rallied 1.9% to 103.20.

Separately, Twitter agreed to be acquired by an entity wholly owned by Elon Musk for approximately $44 billion, or $54.20 per share, in cash. Mr. Musk sold over $8 billion of Tesla shares last week to presumably help finance the deal. 

Another nagging negative is first quarter GDP was reported this week at -1.4%.

This is a big swing from the previous quarter which posted a strong 6.9% growth figure and marks the first decline since 2020.

While the economy shrank, there are some silver linings. Both consumer spending and business investment increased for the quarter. Consumer spending increased 2.7% and business investment increased 9.7%. These are the backbone to any economy and still show strong growth despite high inflation _{(Source: Reuters).}

The markets now expect a 50 bps. hike in interest rates at the FOMC meeting this week… that seems to be discounted in the markets and we are seeing evidence that the Fed’s battle with inflation may be gaining ground.

As we have said many times, volatility works both ways…

Market Update…

• Oil Prices- Oil futures ended lower last Friday with West Texas Intermediate crude for June delivery falling 0.6% to settle at $104.69/barrel. Brent crude rose 2.5%. For the month, it rose 1.3%, its smallest monthly gain and settled up $1.75 to $109.34/barrel.
• Gold - Spot gold was up 0.7% to $1,908.20 per ounce while U.S. gold futures rose 1.1% to $1,911.20 per ounce. Silver finished the week at $23.085.
• U.S. Dollar - The dollar index fell 0.4% after touching a 20-year high last Thursday. Euro/US$ exchange rate is now 1.068.
• U.S. Treasury Rates - On Friday, the yield on the 10-year Treasury rose 2.3 basis points to 2.885%.
• Asian shares were mostly lower in overnight trading.
• European markets are trading mixed.
• Domestic markets are trading flat this morning.

Let’s keep all of this in perspective… companies continue to report better than expected earnings results. Of the 55% of S&P 500 companies who have reported, 80% have beaten EPS estimates and 72% have beaten revenue estimates.

However, the current earnings growth is 7.1% for the quarter, well below the 5-year average of 15%. If you exclude Amazon, the growth figure is a bit better, rising to 10.1%, but still below average _{(Source: Factset).}

Analysts say Wall Street’s pessimism isn’t likely to end until the major concerns are resolved, and when that will happen is uncertain.

Another big week is in store for earnings with 161 S&P 500 companies reporting. We’ll hear from McDonald’s, Clorox, AIG, Pfizer, Starbucks, and Kellogg’s, and many more.

We should focus on the many companies that have been reporting strong earnings, beating both top- and bottom-line estimates … and their continued strength should help to stabilize the market as we endure this tremendous volatility.

Have a wonderful week!

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