Market Commentary for the week of April 25, 2022

 

The rollercoaster continues as the markets are trying to make sense of rising interest rates as well as the continued conflict in the Ukraine.  The past few days have witnessed extremely volatility within all markets as the search for capitulation continues.  Selling pressure over the last few market sessions has contributed to these extreme market movements.  It is wise to continue to keep a long-term focus.  Those trying to outthink the markets may be rewarded short-term, but I always preach that investing is marathon not a sprint. 

Until next time,

Darin & Greg

   

ECONOMIC REVIEW[1]

• A slew of housing data released last week illustrating generally strong demand despite continuing supply issues challenging builders and a sharp rise in mortgage rates pushing up median prices.
  • Existing home sales declined slightly in March, slowing to a 5.77 million annual rate only just exceeding expectations, though the median price rose to $375,300 and is up 15% since last year.
• Housing starts and new building permits both increased last month, up 0.3% and 0.4% respectively, both easily beating consensus expectations.
  • March gains were entirely due to multi-family construction, which is up 26.2% in the past year. Single-family construction is down 4.4% over the same period.

 

How does this impact you?

• Impact of Existing Home Sales:
  • The 30-year mortgage rate has risen 200 basis points since December, as an effect slowing sales, but the housing market remains tight.
  • Inventories are still down 9.5% from a year ago despite the month’s supply of existing homes for sale (how long it would take to sell today’s inventory at the current sales pace) rising slightly to 2.0 months.
    • Buyers appear undeterred by these headwinds as 87% of existing homes sold were on the market for less than a month.
• Impact of Housing Starts and Permits:
  • The upside surprise in starts and permits reflects the desire of builders to address near record-low inventories and meet rising demand as Millennials continue to shift towards home ownership.
    • Rising mortgage rates have likely pushed some buyers back to the rental market, and rising rents, up roughly 17% in the last year, have encouraged builders to shift their focus to apartment buildings.
  • The U.S. requires roughly 1.5 million housing starts per year to address population growth and scrappage (voluntary knockdowns, natural disasters, etc.), and 2021 marked the first time that quota was met since 2009.

   A LOOK FORWARD¹

• Two important data points for the Federal Reserve release this week, their preferred inflation measure – “Core” PCE, and consumer sentiment and inflation expectations from the University of Michigan Survey.
  • Should the Core PCE measure ease slightly as the CPI did through March, it may signal to the Fed that inflationary pressures could abate sooner than expected.

 

How does this impact you?

• Impact of PCE:
  • As this is the measure the Fed pays closest attention to, it will affect their inflation and growth outlook going forward, ultimately influencing the path of rate hikes. The market has priced in an aggressive Fed, but they remain committed to being data dependent, and easing inflation would affect calculations.

MARKET UPDATE

Market Index Returns as of 4/22/221	WTD	QTD	YTD	1 YR	3 YR	5 YR
S&P 500	-2.74%	-5.65%	-9.99%	4.76%	15.61%	14.76%
NASDAQ	-3.83%	-9.70%	-17.77%	-6.47%	17.98%	17.88%
Dow Jones Industrial Average	-1.82%	-2.41%	-6.42%	1.89%	10.80%	12.95%
Russell Mid-Cap	-2.65%	-4.36%	-9.79%	-1.67%	12.38%	11.65%
Russell 2000 (Small Cap)	-3.20%	-6.22%	-13.28%	-12.14%	8.89%	8.43%
MSCI EAFE (International)	-1.53%	-4.37%	-10.02%	-6.82%	5.29%	5.88%
MSCI Emerging Markets	-3.33%	-5.64%	-12.22%	-18.00%	1.92%	4.66%
Bloomberg Barclays US Agg Bond	-1.04%	-3.78%	-9.49%	-8.71%	0.56%	1.17%
Bloomberg Barclays High Yield Corp.	-0.88%	-2.67%	-7.38%	-4.07%	3.26%	4.02%
Bloomberg Barclays Global Agg	-1.36%	-4.56%	-10.44%	-12.12%	-0.67%	0.05%

    OBSERVATIONS

• U.S. equities continued their move lower as indicated by the S&P 500 which was down -2.74% on the week.
• In the U.S., smaller sized companies underperformed their larger-sized counterparts, as the Russell 2000 shed -3.20%.
• International stocks as measured by the MSCI EAFE were negative again, down -1.53%, but outperforming domestic stocks.
• Emerging market stocks continued to fall with the MSCI EM decreasing -3.33%.
• U.S. investment grade bonds were negative last week with the Bloomberg Barclays U.S. Aggregate Bond index down -1.04%.

 

• BY THE NUMBERS

BEHIND THE AVERAGE– The S&P 500 was up +15.6% (total return) over the 1-year ending 3/31/2022, an average monthly gain of +1.22% (total return).  However the index actually fell in 4 of the last 12 months, posting monthly results that ranged from a gain of +7.0% (total return) to a loss of 5.2% (total return).  The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation.  It is a market value weighted index with each stock's weight in the index proportionate to its market value (source: BTN Research).         

 

BIG SWINGS - The yield on the 10-year Treasury note was cut in half during the first year of the pandemic (2020), falling from 1.91% on 12/31/2019 to 0.91% on 12/31/2020.  That movement in rates has flipped around in the first 16 weeks of 2022 as the yield on the 10-year Treasury note has nearly doubled, rising from 1.50% on 12/31/2021 to 2.91% as of last Friday’s close on 4/22/2022 (source: Treasury Department). 

 

MISSING FROM WORK - An estimated 3.4 million American workers dropped out of the US labor force since early 2020 when the global pandemic began and have chosen not to return, i.e., the difference between a projected 167.8 million workers that would have been in the labor force if the pandemic had not occurred vs. 164.4 million workers actually in the labor force as of March 2022 (source: Department of Labor).

 

 

Reprinted with permission from BTN. Copyright © 2022 Michael A. Higley.

 

 

 

 

 

Economic Definitions

Existing Home Sales: This concept tracks the sales of previously owned homes during the reference period. Total existing home sales include single-family homes, townhomes, condominiums and co-ops. All sales are based on closings from Multiple Listing Services. Foreclosed homes are only counted in the inventory if the bank is working with a realtor. Foreclosed homes that sell via auction (or other closings outside of the Multiple Listing Services) are not included.

Housing Starts: Housing (or building) starts track the number of new housing units (or buildings) that have been started during the reference period.

PCE (headline and core): PCE deflators (or personal consumption expenditure deflators) track overall price changes for goods and services purchased by consumers. Deflators are calculated by dividing the appropriate nominal series by the corresponding real series and multiplying by 100.

 

 

 

 

Index Definitions

S&P 500: The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

NASDAQ: The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Russell Mid-Cap: Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index, which represent approximately 25% of the total market capitalization of the Russell 1000 Index.

Russell 2000: The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 total market capitalization. The real-time value is calculated with a base value of 135.00 as
of December 31, 1986. The end-of-day value is calculated with a base value of 100.00 as of December 29, 1978.

MSCI EAFE: The MSCI EAFE Index is a free-float weighted equity index. The index was developed with a base value of 100 as of December 31, 1969. The MSCI EAFE region covers DM countries in Europe, Australasia, Israel, and the Far East.

MSCI EM: The MSCI EM (Emerging Markets) Index is a free-float weighted equity index that captures large and mid-cap representation across Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.

Bloomberg Barclays US Agg Bond: The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

Bloomberg Barclays High Yield Corp: The Bloomberg Barclays US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition,
are excluded.

Bloomberg Barclays Global Agg: The Bloomberg Barclays Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate, and securitized fixed-rate bonds from both developed and emerging markets issuers.

 

Disclosures

Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. Past performance cannot guarantee future results.

Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect again loss. In general, the bond market is volatile; bond prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed-income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Vehicles that invest in lower-rated debt securities (commonly referred to as junk bonds or high-yield bonds) involve additional risks because of the lower credit quality of the securities in the portfolio. International investing involves special risks do not present with U.S. investments due to factors such as increased volatility, currency fluctuation, and differences in auditing and other financial standards. These risks can be accentuated in emerging markets.

The statements provided herein are based solely on the opinions of the Advisor Group Research Team and are being provided for general information purposes only. Neither the information nor any opinion expressed constitutes an offer or a solicitation to buy or sell any securities or other financial instruments. Any opinions provided herein should not be relied upon for investment decisions and may differ from those of other departments or divisions of Advisor Group or its affiliates.

Certain information may be based on information received from sources the Advisor Group Research Team considers reliable; however, the accuracy and completeness of such information cannot be guaranteed. Certain statements contained herein may constitute “projections,” “forecasts” and other “forward-looking statements” which do not reflect actual results and are based primarily upon applying retroactively a hypothetical set of assumptions to certain historical financial information. Any opinions, projections, forecasts and forward-looking statements presented herein reflect the judgment of the Advisor Group Research Team only as of the date of this document and are subject to change without notice. Advisor Group has no obligation to provide updates or changes to these opinions, projections, forecasts and forward-looking statements. Advisor Group is not soliciting or recommending any action based on any information in this document.

Securities and investment advisory services are offered through the firms: FSC Securities Corporation, Royal Alliance Associates, Inc., SagePoint Financial, Inc., Triad Advisors, LLC, and Woodbury Financial Services, Inc., broker-dealers, registered investment advisers, and members of FINRA and SIPC. Securities are offered through Securities America, Inc., a broker-dealer and member of FINRA and SIPC. Advisory services are offered through Arbor Point Advisors, LLC, Ladenburg Thalmann Asset Management, Inc., Securities America Advisors, Inc., and Triad Hybrid Solutions, LLC, registered investment advisers. Advisory programs offered by FSC Securities Corporation, Royal Alliance Associates, Inc., SagePoint Financial, Inc., and Woodbury Financial Services, Inc., are sponsored by VISION2020 Wealth Management Corp., an affiliated registered investment adviser. Advisor Group, Inc. is an affiliate of these firms. 4703327