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USA Today's: THE TOWN JOURNAL. 05.02-05.08.2022. Week 18.

This bi-weekly financial section is published in USA Today's: The Town Journal. This publication is distributed in Bergen County New Jersey, covering 4 towns with roughly 22,000 residents.


WILD RIDE LEAVES STOCKS AT 2022 LOWS


US Markets

The last two weeks have been a wild ride for market participants. Over the last 10 trading days, The S&P 500 has 4 days where price dove lower by more than 2% and 2 days where we jumped higher by more than 2%. These large single-day moves, on average, are at their largest since March and April of 2020.


Last month, 04/2022, the S&P 500 had its worst month, giving back 8.8%, since March of 2020 where it gave back 12.5%. The Nasdaq 100 lost 13.6% which eclipsed its March 2020 loss of 8.75%. The Nasdaq 100 has not seen this large of a monthly decline since October of 2008. Another piece of concerning data comes from Thrasher Analytics. Their research shows that the percentage of S&P 500 stocks below their March 8th level is expanding and nearing 50%, indicating price deterioration of almost half of the S&P 500’s components.


To temper that concerning data, we turn to research from Ryan Detrick of LPL Financial. He writes, “There have been 24 other corrections for the S&P 500 since WWII. The average correction was 14.3% and took 133 days.” As of Friday, 05/06/22, the S&P 500 is down literally 14.3%. It has been fading since January 3rd, the first trading day of 202. That is 87 days, 97 if you include weekends. I do not know if Ryan’s research does or does not include weekends. He concludes, “Yes, this isn't done and there could be more pain, but this isn't very out of the ordinary yet.” One additional optimistic piece of data comes from All-Star Charts. They share data that shows we still have more stocks making new 52-week lows than stocks making new 52-week highs, but the number of net new lows peaked in January. The fact that this number has been decreasing points to a potential upside resolution if the pattern continues.


Last week, 05/02 - 05/06, The S&P 500 closed down with a loss of 0.16%. The tech-driven Nasdaq 100 finished with a loss of 1.28%. The “blue chip” Dow Jones Industrial Average finished with a loss of 0.24%. The speculative, small-cap Russell 2000 finished with a loss of 1.28%. 5 of 11 S&P 500 sectors closed higher and outperformed the S&P 500. Those were led by a 10+% in energy, and followed with modest gains from utilities and financials. The laggards were consumer discretionary and real estate.


Market Moving Headlines

On Monday, 05/02, we received the Institute for Supply Management’s (ISM) Manufacturing Purchasing Manager’s Index (PMI). According to the ISM PMI survey, manufacturing grew in April. The Manufacturing PMI came in at 55.4%, 1.7 percentage points lower than the March reading of 57.1% percent. A reading above 50 shows manufacturing is healthy and in an expansionary phase, whereas a reading below 50 shows the opposite. Manufacturing performed well for the 23rd straight month, with demand registering slower month-over-month growth.


On Tuesday, 05/03, the US Bureau of Labor Statistics (BLS) released its April JOLTS (Job Openings and Labor Turnover) report. The picture was largely the same as last month. Job openings recorded a series high of 11.5 million. That number was little changed from last month. Hires came in at 6.7 million and separations at 6.3 million. Both of these edged slightly higher month over month. This data shows that for every hire, there were almost 2 job openings. We continue to have more job openings than hires. Year over year, hires were 77.7 million and separations totaled 71.4 million, meaning the net employment change was positive. More people are employed now than at this time last year. While this can be judged as positive, more jobs are better, right? That depends. Good economic news is generally bad for markets. In this case, the labor report sends the Federal Reserve the message that this strong labor market can handle its planned monetary tightening which is not good for stocks. The U.S. economy is almost back to pre-pandemic employment figures with over 151.3 million nonfarm employees. The unemployment rate reads 3.6%, just a little above its all-time low of 3.5% from January and February of 2020.


Also on Tuesday, 05/03, The US Census Bureau released the latest Factory Orders report. Factory orders in the US jumped by 2.2% month over month. This was the largest increase since May of 2021 and twice the market forecast. This report signaled strong demand for goods, despite soaring prices and supply constraints. The largest increases were seen in orders for ships and boats, metalworking machinery, and defense search and navigation equipment. Orders for computers and electronics and for primary metals saw a significant increase.


Finally on Tuesday, 05/03, the CoreLogic Home Price Index report found housing prices jumped 20.90% in March from the year before. This was the largest jump since the group began collecting data in 1976. The cities with the largest increases were Phoenix, Las Vegas, and San Diego.


On Wednesday, 05/04, we had the highly anticipated press conference held by the Federal Reserve Bank. Chairman J. Powell announced a 50 basis point (0.50%) interest rate hike, a first in more than 20 years. In pleasing news to markets, though not for the economy, he did respond to a question by saying a 75 basis point (0.75%) hike next month is not something they are considering at this time. He further outlined the probable path of 50 basis point (0.50%) hikes at each of the next two meetings. Additionally, he announced the schedule and pace of their 9 trillion dollar, that is $9,000,000,000,000, balance sheet runoff, aka quantitative tightening. They intend to reinvest their principal in Treasuries after running off $30 billion and in mortgage-backed securities after running off $17.5 billion. Both of these numbers, aka caps, will rise after 3 months to $60 billion and $35 billion respectively. After the press conference, the S&P 500 rallied and had its largest single-day gain since May 2020. This was a logical reaction as The Federal Reserve was perceived as being very weak and inconsistent. Expressing, "Inflation is much too high. And we understand the hardship it is causing. We're moving expeditiously to bring it back down," is one thing. To follow those tough words with a meager 50 basis point hike, which has been priced into the market for weeks, with no balance sheet runoff is unlikely to actually curb demand in the economy to reduce the inflation. There is a large disconnect between Chair Powell’s words and his actions. The following day however, the S&P 500 reversed and gave back more than 3.5%. Perhaps market participants realized that the Federal Reserve’s words were an attempt to sugarcoat the situation in order to avoid panic amongst market participants and the general public.


International markets

Last week was another rough week for equities around the globe. 12 of the 12 broad global ETFs we track at East Coast Charts Research closed lower and all printed 52-week closing lows. The losses were led by emerging markets and developed market small-caps. The US was the best of the worst. From a year-to-date perspective, emerging markets are led by commodity exporting and producing countries including Turkey, the UAE, Qater, Chile, Brazil, and Columbia. Other markets are performing very well, including Saudi Arabia and Nigeria.


Fixed Income

Fixed income felt some pain last week as well. 30 of the 31 ETFs we track at East Coast Charts Research closed lower. Those 30 ETFs all printed fresh 52-week and all-time closing lows. In the US treasury space, the long end of the treasury curve continues to be sold off the hardest. The yield on the benchmark 10-year US Treasury Note closed the week just above 3%. This is the first time it has been this high since 2018.


Commodities

Last week, the commodity complex was carried by energy. Livestock did gain 33 basis points (0.33%) as well. Both base and precious metals printed 13-week closing lows. Agriculture printed a 4-week closing low.


Gasoline rallied more than 10% last week to new all-time highs. Energy, including oil, natural gas, and gasoline continue to stand out as the most resilient risk assets. It is interesting to note, gold miners, copper miners, and steel producers have been falling since being rejected from their previous price highs. These groups are seen as “inflationary stocks.” The fact that these “inflationary stocks” have turned down confirms the vulnerability of this market. In a rising rate environment, these groups not participating sends a message of caution. I believe to the competing narratives around inflation peaking or not peaking.


Gold closed down at $1,882.80 per ounce. WTI Crude Oil closed up at $109.77 a barrel.

Gasoline also finished last week higher at $3.66 per gallon. The US Dollar Index closed higher at $103.69, this is multi-decade high last seen in 2002.


The Week Ahead

With all of the above information, we have not even touched on earnings, and we are in the thick of earnings season. Just know, we still have more companies reporting upside surprises than downside. The current concerns are less around stalling earnings and a weakening economy and more about inflation and geopolitical issues.


Next week we will be watching for the following pieces of economic data:

  • Wednesday, 05/11, Consumer Price Index (CPI).

  • Thursday, 05/12, Producer Price Index (PPI).

  • Friday, 05/13, University of Michigan’s Consumer Sentiment Survey.


So, what should we take away from all of the above information? The weight of the evidence still argues for serious caution from an investment perspective. The only thing we know is that we are unable to predict the future. Listen to the data, not the story you, or others, want to tell about the data. Predictions undermine credibility. It is vital to keep a flexible, unbiased, and open mind about the probabilities of both better-than-expected and worse-than-expected outcomes.

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