Weekly Market & Economic Update – 5/31/22

I hope you enjoyed Memorial Day weekend and took some time to honor the brave American’s who sacrificed everything so that we could be free.

Early last week I had begun hearing the conversation shift from “inflation” to “recession” among investors and media sources alike. Though this sentiment is scary, it does reflect the overall shift in perception around where things may be headed. However, we ended last week with quite the opposite sentiment in the market. Core Personal Consumption Expenditure (PCE) index – the Fed’s preferred inflation metric – showed signs of easing inflationary pressures, at 4.9%, down from the previous month’s reading of 5.2%. Data also suggested a willingness among consumers to keep spending – pent-up demand for travel continues as warm weather months begin to come about.

With seven consecutive weeks of losses in the market, the more positive news sent the S&P up 6.6% to end the week – avoiding bear market territory – and the Nasdaq up 6.8% – though still considered deep inside bear market territory.

We remain cautious but optimistic as we see inflationary indicators shifting and hope to be delivered the ‘soft landing’ Fed chair, Jerome Powell, has promised.

Below is your Weekly Market & Economic Update by the numbers.

Interested in learning more about markets, inflation, QE or how you can take advantage of current investment opportunities? Schedule a call with me HERE.

Warmly,

Mark Sauer
info@AllOneWealth.com
+1(310)355-8286

Weekly Market Update

• Global Equities:  After seven consecutive weekly losses, the S&P 500 was able to register a positive week, with a gain of 6.6%. The rebound saved the S&P, at least momentarily, from entering an official Bear Market, defined as a -20% drawdown from the prior high. The Nasdaq, which had plummeted nearly -30% from its prior high, also rebounded during the week with a 6.8% gain. The Dow Jones Industrial Average was also 6.3% higher for the week. Developed International Stocks were 3.9% higher while Emerging Markets were up 2.2%.
• Fixed Income: 10-Year Treasury yields retreated from 3%, settling in around 2.75% at week’s end. High yield bonds surged mid-week, with the iShares iBoxx US High Yield ETF (HYG) trading back above its 50-day moving average for the first time since the beginning of April. High yield bond mutual funds and ETFs reported net outflows of $236 million during the weekly period ended May 25th.
• Commodities: Oil prices traded higher, hovering around the $115 mark on Friday for US benchmark West Texas Intermediate crude. Natural gas prices surged and have tripled over the past year to their highest levels since 2008, hitting $9 per btu during the week. The Baker Hughes rig count showed US drillers reduced capacity by two oil rigs, to 574, during the week.

Weekly Economic Update

• FOMC Minutes: The minutes from the early May Federal Open Market Committee meeting revealed consensus among most members to proceed with half-point rate hikes for the next two meetings, with a reassessment of inflation to follow. This puts the Fed on a trajectory to bring its benchmark rate up to a range of 1.75-2.0% by July, with the market pricing in a Fed Funds rate of 2.5-2.75% as the most probable year-end 2022 target rate. The FOMC also expressed concerns over unregulated trading in commodities markets as a potential liquidity event for large banks, broker-dealers, and their clients.
• Peak Inflation? The Fed’s preferred inflation metric, the Core Personal Consumption Expenditure (PCE) index, showed signs of easing inflationary pressures, at 4.9%, down from the previous month’s reading of 5.2%. Underlying data revealed a willingness from consumers to keep spending, albeit at the cost of their savings, as warm weather and pent-up demand for travel kept pocketbooks open. Markets reacted positively to the news, which raises the possibility that the Fed will be able to moderate its rate hikes if inflation eases organically.
• Earnings Update: Retailers have been under tremendous pressure as inflation threatens margins and alters consumer buying behavior, as evidenced by the massive post-earnings declines in Walmart (WMT) and Target (TGT) earlier in the month. This week, some discount retailers bucked the trend with big earnings beats. Dollar General (DG) and Dollar Tree, Inc. (DLTR) both benefited from more cost-conscious consumers seeking value. Shares rose over 13% for Dollar General and more than 21% for Dollar Tree immediately following earnings. Mega-retailer Costco (COST) also reported during the week, beating estimates on both revenue and earnings, but shares were slightly down due to lower same-store sales.

Chart of the week

The Chart of the Week is a year-to-date view of the iShares iBoxx US High Yield ETF (ticker HYG), representing High Yield or “junk” bonds, plotted against its 50-day moving average (blue line). High Yield bonds have benefited tremendously from the Fed’s easy money policies and direct support during the COVID selloff. During periods of extremely low rates, many investors were forced to take on the excess risk of investing in junk bonds to meet their yield requirements. Now that safer fixed income investments are offering higher returns, investors have reduced their high yield holdings, while rumblings of recession risk also pressured the asset class. Amidst this bearish backdrop, however, HYG staged an impressive turnaround this week, breaking the 50-day moving average and perhaps putting in at least a temporary bottom. If the Fed can engineer a “soft landing” without a significant recession, high yield buyers at current levels will be richly rewarded.