Or has it already fallen?
Our empathy and understanding rarely extend beyond our line of sight. If we’ve not experienced it then we often do not recognize it. We are conditioned from previous recessions, especially our most recent – 2008’s ‘Great Recession’ – and it seems folks are either in denial that anything is happening at all or they’re waiting for an epic economic fallout.
We are in a recession. Let’s be clear: we’re in the trenches, already.
As of today, May 9th at 7:33am Pacific Time, the S&P 500 is down -16% and the Nasdaq is down -25%, year-to-date. The cost of energy, goods and services have increased tremendously. Housing is at an all-time high. Safe-haven government bonds are falling alongside equities – in the case of long-term Treasuries, their drawdown now exceeds -22%.
There’s a lot of discussion around ‘inflation’. The current thinking is if prices of goods and services go up, we have ‘inflation’ – this is true in some sense, but it’s an over simplification of inflation. A more accurate reflection is if wages go up at a faster rate than prices, then you have ‘inflation’. If prices go up faster than wages, the result is a recessionary impact more than anything else.
So how much worse will it get? I cannot be certain – how the dominos fall is so nuanced. However, due to aggressive rate hikes coming down the pipeline, I would project a contraction in the real estate market before long, as well as, a continued contraction in the equity markets. I do not, however, believe we are in for an epic economic fallout. This is yet another reset and an opportunity for investors to capture substancial long-term value.
As investors, we need to look at the truth of where we are and seek out how best to allocate our capital during this time to serve us once the dust has settled. We must think long-term – buying at market lows. Allocating to companies who create inherent value for society during a time of growing economic uncertainty; whose bottom line will not be destroyed by the increasing cost of debt (interest rate hikes); and whose products/services will meet the needs of an ever-changing world.
Below is your Weekly Market & Economic Update by the numbers.
Interested in learning more? Schedule a call with me HERE.
Warmly,
Mark Sauer
info@AllOneWealth.com
+1(310)355-8286
Weekly Market Update
- Global Equities: Volatility continued this week, with equities swinging wildly following the May Federal Reserve policy meeting. US Equity indices initially surged during the Fed press conference but sold off sharply on Thursday for their worst single day returns since the depths of the COVID-19 selloff of 2020. At the end of the week, the S&P 500 was -0.2% lower, the Dow Jones Industrial Average was down –0.2% and the Nasdaq lost -1.5%. The move puts US equities at new year-to-date lows. International stocks fared even worse, with Developed international markets down -2.0% and Emerging markets down -3.4%.
- Fixed Income: 10-Year Treasury yields finally crossed the 3% mark, surging to 3.12% by the end of the week. High Yield bonds remained under pressure, down another -0.8% in volatile trading. Heavy outflows were seen in Investment Grade corporate bonds as investors pulled $5.5 billion, while High Yield outflows were also significant at $1.1 billion.
- Commodities: Oil prices have slowly crept back up above $100, sitting around $110 on Friday. Supply worries and European Union restrictions on Russian oil are contributing to the upward price pressure. US oil and gas drillers continued to bring on capacity, with 7 additional oil and gas rigs operational during the week according to Baker Hughes.
Weekly Economic Update
- Fed Hikes as Planned: The Federal Reserve Open Market Committee (FOMC) convened for its May policy meeting, hiking the benchmark rate by 50 basis points, as widely expected. Market reaction was muted until Chairman Powell held his press conference. Asked whether the FOMC would pursue more aggressive rate hikes in future meetings, Powell stated that “75 basis point in an increase is not something the committee is actively considering.” His comments triggered a rally in equity markets; however, the celebration was short lived as markets opened Thursday in the red and continued falling through the week.
- Jobs Data: The April jobs report showed a rise of 428,000, exceeding consensus forecasts of 400,000. The unemployment rate remained in line with consensus unchanged at 3.6%. The participation rate was slightly down at 62.2% vs. 62.4% in March. The Job Opening and Labor Turnover Survey (JOLTS) data for March was also released this week, showing record levels of employees quitting their jobs, an indication that workers have a high degree of confidence in their ability to find better paying work. The robust employment data should give the Fed plenty of confidence to continue hiking interest rates aggressively.
- Earnings Update: After several years of significantly underperforming other economic sectors, energy companies are basking in record high oil prices, as evidenced by their phenomenal earnings. Marathon Oil (MRO), BP (BP) and Shell Oil (SHEL) all beat expectations thanks to high priced crude. Outside the energy sector, earnings have been a bit more mixed. The latest victim of an earnings miss was Under Armour (UA), with shares down around –24% due to supply chain issues. E-commerce names Shopify (SHOP) and EBay (EBAY) were also down sharply following disappointing results.
Market Data Source: Hanlon Investment Management
