· The fear of a hotter than expected retail inflation number as represented by the Consumer Price Index (CPI) pushed stocks down Thursday. On Friday, that fear was realized as the Bureau of Labor Statistics reported that the May CPI jumped 1.0% and by 8.6% y/y. As a result both stocks and bonds again sold off with stocks settling near year-to-date lows and interest rates as represented by U.S. Treasury Notes at or near multi-year highs.
Two of the main culprits impacting the CPI are those that Americans experience daily, that is the rising costs of food and energy. During May food costs spiked 1.2% (10.2% y/y) while energy costs soared 3.9% (34.6% y/y). The sustained rise in the CPI and how to slow this rise down should be the main topics when the Open Market Committee of the Federal Reserve meets this coming Tuesday and Wednesday. We have been on record stating that the Fed will likely hike rates by at least 0.50% at each of the next two meetings. Fed Chair Jerome Powell has recently stated that “a 75-basis point increase is not something that the committee is actively considering.” Although a 75-basis point increase is now most certainly being considered by the Fed, we believe that it would be premature as June marks the first month of Quantitative Tightening (QT), a process in which the Fed allows bonds and mortgage-backed securities to mature thereby shrinking its balance sheet and slowing economic growth. In addition, higher rates will do little to bring into balance the supply chain which is a must if inflation is to abate. As we have noted many times previously, the bottoming in equity prices will be a process rather than an event and will occur as the supply/demand equation comes back into balance. It will continue to be a challenge for the Fed to thread this needle.
· Investors certainly know that there is a lot of uncertainty. Eventually, some of these uncertainties will sort themselves out, prices will have taken into consideration the uncertainties or investors will tire of the uncertainties and begin to focus on their long-term objectives rather than on the current market malaise. This is the human condition. Think of tragedies in our lives. Long-term optimism is replaced by a shorter-term self-absorbed focus which in time is once again replaced by that longer-term optimism. The bottom line is that eventually investors will begin to become less absorbed with the day-to-day negative price action of their portfolios and once again focus on the longer-term benefits of investing. As the fear subsides, so will the panic selling and the financial markets will settle down.
· Historical data provide a guide, a potential window to future events. Investors must keep in mind that after every bear market in the history of the United States, stocks have gone on to set new record highs. Furthermore, we have allocated your assets for these trying times as well as those that are more fruitful. Regardless of this it is important to keep in mind that ultimately markets such as this test the patience, faith and resolve of even the most seasoned investors.
· A component to traditional, longer-lasting bear markets is the emotional strain it places upon the investor. Just as bull markets place pressure on investors sitting on the sidelines, bear markets exert the same force on those that have money in the market. Should the market remain choppy as we believe it will at least throughout the summer, you can count on a steady drumbeat from talking heads questioning the validity of long-term investing. We have regularly noted that unlike recent pullbacks, the recovery from this one will most likely be more of a process rather than an event and would recommend our clients to ignore the short-term and focus on your long-term objectives.
· According to AAA, gas prices have risen to a national average of $5.004 a gallon and in doing so topped $5 for the first time ever. The tight global energy market as well as limited refining capacity suggests prices will stay elevated for the foreseeable future.
· Meta Platforms, the company formerly known as Facebook has changed its symbol from FB to META.
· The yield on U.S. Treasuries spiked all along the curve. Most noticeable, the yields on the two, five and ten-year notes rose to 3.06%, 3.25% and 3.15% from 2.66%, 2.95% and 2.96% one week prior. It is our belief that the global equity markets will most likely continue to be held hostage by movements in interest rates.
· Target increased its quarterly dividend by 20% to $1.08 from $0.90 bringing the current yield to nearly 3%.
· The business cycle has not been repealed! Recessions are necessary as they bring back into balance supply and demand. In addition, through creative destruction, recessions also revitalize the economy, positioning it for future growth.
· According to the National Association of Realtors, U.S. Housing Affordability during April has fallen to its lowest level since August 2007, this as the Mortgage Bankers Association’s Loan Applications Index fell to a twenty-two year low. Given the recent spike in interest rates, neither should come as a surprise.
· At the current time, there is room as well as the necessity for both tactical as well as strategic investing in one’s portfolio, even for long-term investors. The former being quite active, driven by fundamental analysis with purchases or sales confirmed by technical analysis while the latter being much more passive. As predominantly strategic investors, we will work hard to better inform our clients of the need for more tactical investing and work on better executing this discipline.
· The financial markets (especially the stock market) rise on fundamentals, but fall on technicals. Currently, technical analysis
which identifies trends or patterns in an underlying security, industry, etc… rules the day.
· Can we blame at least some of the volatility on the fact that this is a Mid-Term Election Year? Quite possibly as according to statistics gathered by U.S. Bank and published on March 4, 2022, the average return of the S&P 500 during the year of the midterm through October 31 was 0.3%. During non-midterm years the rate of return averaged 10.7%. Furthermore, from November 1 of the midterm year through October 31 of the following year the S&P 500 rose by an average of 16.3%. As an aside, please note that during each of the 16 periods following the midterms noted above, the S&P 500 was always higher.
· The Vanguard Balanced Index Fund (VBAIX), somewhat of a proxy for balanced investors has fallen 15.57% year-to-date as, in addition to the pullback in stocks, bonds, which comprise nearly 40% of the portfolio, have been under pressure. For example, the Vanguard Total Bond Market Index Fund (VBMFX) has fallen 10.76%.
· The upcoming week presents some potentially market moving reports, to include on Tuesday, May Wholesale Inflation as measured by the Producer Price Index (PPI); on Wednesday, May Retail Sales and April Business Inventories; on Thursday the Weekly Report of Initial Claims for Unemployment Insurance and May Housing Starts; and on Friday, May Industrial Production and Capacity Utilization along with the May Index Of Leading Economic Indicators (LEI) as reported by the Conference Board.
· The corporate earnings season has begun to wind down. Nevertheless, there are some important reports expected this coming week. These include Oracle Corporation (ORCL), H&R Block (HRB), Adobe (ADBE), Commercial Metals (CMC), Jabil (JBL) and Kroger (KR).