WEEKLY MARKET SUMMARY - WEEK ENDED JUNE 3, 2022

Dennis
&
Aaron

· After battling to notch fractional gains through Thursday during the holiday shortened week, stocks gave back those and then some on Friday amid weak, summer-like trading. That said, after the prior week’s multi-percent move higher, we would consider this week a net plus. Time will tell if this is another failed rally since the correction began earlier this year or something more sustainable.

When the New York Giants or Jets won a football game last season nobody thought either team was on its way to the Super Bowl. After seven consecutive losing weeks for the S&P 500 as well as the NASDAQ Composite and eight for the Dow Jones Industrial Average (its longest in 99 years), the indexes were due for a bounce. Noticeably, move higher that perhaps culminated this past Thursday was the fifth five percent plus bounce in the S&P 500 since its record high close set January 3rd. We’ve been around a long time and realize that every bounce begins with skepticism. We will see if that skepticism is justified or perhaps the correction has mostly run its course.

It is our belief that at this time the decline in the stock market has indeed mostly priced in a modest recession. Certainly, stocks can overshoot to the downside. However, for investors with a time horizon of more than a minute or two, certain dislocations have priced some industries and specific securities very attractively. With this in mind, and given what we believe will be a choppy summer, dollar cost averaging would be a prudent course of action.

· 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.

· The equity markets will most likely continue to be held hostage by movements in interest rates. As they rise, stocks should struggle as we saw this past week with the yield on the 10-year U.S. Treasury note jumping from 2.74% to 2.96%. Interest paid on sovereign bonds around the world also rose accordingly.

· The mid-cap Russell 2000 along with the Dow Jones Transport Average outperformed some of the broader indices. Just something to keep an eye on.

· In addition to rate hikes along with Quantitative Tightening (QT), jawboning is a component to the inflation fighting process being utilized by the Fed. As an example, take a look at the quotes below from Federal Reserve Vice-Chair Lael Brainard and Cleveland Federal Reserve President Loretta Mester.

· Fed Chair Jerome Powell should never have stated that “a 75 basis point increase is not something that the committee is actively considering.”? There was no need as the market interpreted this as a continuance of a too dovish Fed. There was nothing to gain.

· 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 12.36% 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 9.45%.

· For reasons noted above, we expect 0.50% consecutive hikes in the Federal Funds rate following the June 15 as well as July 27 meetings of the Open Market Committee of the Federal Reserve. In addition and despite claims by Chair Powell to the contrary, we believe a 0.75% increase at the conclusion of the June meeting is not off the table.

· The upcoming week presents some potentially market moving reports, to include on Tuesday, April Trade Balance and April Consumer Credit; on Wednesday, April Wholesale Inventories; on Thursday the Weekly Report of Initial Claims for Unemployment Insurance; and on Friday, May Retail Inflation as measured by the Consumer Price Index (CPI).

· The corporate earnings season has begun to wind down. Nevertheless, there are some important reports expected this coming week. These include Coupa Software (COUP), Healthequity, Inc. (HQY), JM Smucker (SJM), Campbell Soup (CPB), Five Below (FIVE), Nio, Inc. (NIO), Docusign (DOCU), and Vail Resorts (MTN).

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