The Week in Review 5/23/22

"I'd be a bum on the street with a tin cup if the markets were always efficient." - Warren Buffett

Its official… the S&P 500 briefly enters bear market territory!

And in only 5 months? The velocity is both amazing and frightening! 

The S&P 500 fell 3.1% again last week, which featured disappointing corporate updates and economic data that stoked growth concerns. Earnings have been mostly good but forward guidance has been disappointing! Retailers have dropped some surprisingly poor numbers, adding to the rampant pessimism.

The Nasdaq Composite underperformed with a 3.8% decline, followed by the Dow Jones Industrial Average (-2.9%) and Russell 2000 (-1.1%). 

The consumer staples (-8.6%) and consumer discretionary (-7.4%) sectors were the weakest links as high-profile retail companies like Walmart, Target, and Ross Stores each cited sticky cost pressures for their disappointing results and cautious outlooks. Investors are concerned about the durability of the consumer in this high-cost environment.

Conversely, the utilities (+0.4%), health care (+0.9%), and energy (+1.1%) sectors each ended the week in positive territory. 

There were plenty of rebound efforts throughout the week amid a contrarian-minded sentiment rooted in the oversold nature of the market and by a BofA Global Fund Manager Survey that showed cash levels at their highest position (6.1%) since 9/11 and the largest underweight position in equities since May 2020.

Arguably, the most important rebound effort was at the end of the week, which took the S&P 500 out of bear market territory (-20% from a recent high). Unfortunately, though, growth concerns fueled by persisting inflation and supply chain disruptions were the dominant issue for the market.

Like Walmart, Target, and Ross Stores, Home Depot was pressured by higher costs, evident by an 8.2% yr/yr decline in customer transactions in the first quarter. Cisco, Applied Materials, and Deere, meanwhile, highlighted supply chain problems in their earnings reports. 

On top of that, last week's economic data was also relatively disappointing: 

• The May Empire State Manufacturing Survey turned negative with a reading of -11.6 (consensus 15.0)
• Weekly initial claims were higher than expected at 218,000 (consensus 200,000)
• The Philadelphia Fed Index dropped to 2.6 in May (consensus 16.5)
• The Conference Board's Leading Economic Index (LEI) decreased 0.3% m/m in April (consensus 0.0%)
• Existing home sales fell 2.4% m/m in April to a seasonally adjusted annual rate of 5.61 million (consensus 5.65 million)
• Building permits for April fell 3.2% m/m to 1.819 million (consensus 1.820 million)
• The Weekly MBA Mortgage Applications Index fell 11.0%

Fed Chair Powell spoke on inflation last week, saying the Fed will be more aggressive with rate hikes if inflation doesn't come down in a clear way, but that the Fed can be less aggressive if inflation does clearly come down. This really didn’t help investor sentiment very much. 

The 10-yr yield dropped 15 basis points to 2.79% while the 2-yr yield decreased one basis point to 2.58%. 

Market Update…

• Oil Prices–West Texas Intermediate crude for June delivery settled 0.9% higher at $113.23/barrel while Brent crude for July settled 0.46% higher at $112.65/barrel.
• Gold - Spot gold rose 0.17% to $1,844.82 per ounce while U.S. gold futures rose 0.12% to $1,843.5 per ounce. Gold prices have climbed about 1.9% this past week. Silver finished the week at $21.674.
• S. Dollar - The dollar experienced its worst week since early February. The dollar index rose 0.34% to $103.07. Last Friday, it soared to the highest since January 2003 at $105.01. Euro/US$ exchange rate is now 1.079.
• S. Treasury Rates- The yield on the 10-year Treasury note fell 7 basis points to 2.788%.
• Asian shares were in mixed overnight trading.
• European markets are trading higher.
• Domestic markets are trading in the green this morning.

With all the pessimism around, it seems important to remind us that the bad news has been driven by inflation, supply side chain shortages, and forward looking caution because of fear of the unknown.

These are all temporary phenomenon and the drivers of the great fear now in the markets. Any change in sentiment could be explosive, gauging the amount of fear around… this extreme fear has been found at market bottoms in the past.

_{Source: CNN/Money}

This week will be a light week in terms of economic news. We will get Manufacturing PMI (Purchasing Manager’s Index) on Tuesday and new PCE (Personal Consumption Expenditures) data on Friday. The PCE index is the Fed’s preferred inflation index. After the slight downtick in the CPI (Consumer Price Index), a commensurate downtick in the PCE is expected by many economists. We can hope that inflation is peaking.

We have a 3 day weekend coming, celebrating Memorial Day next Monday, our markets will be closed in observance.

Have a wonderful week!

Michael D. Hilger, CEP^®
Managing Director

Senior Vice President, Wealth Management

5956 Sherry Lane, Suite 1900 / Dallas, TX 75225
Private Line: 214-365-5579 / Cell: 214-202-2540
Private Toll Free:  877-208-7474 / Fax 214-691-5588

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