Market Commentary for the week of May 16, 2022

As with past updates the markets continue to seek capitulation.  The conflict in the Ukraine, rising interest rates and the Fed's actions in relation to inflation are all factors that continue this current rollercoaster.  We continue to advise clients to keep a long-term perspective in relation to their current investment portfolio.  For those with money on the sidelines we recommend a 'dollar cost average' strategy.  It does hurt to invest when things look so dire, but that is exactly when you find the best value. 

While the markets may produce daily headlines, it is capitalism that we are investing in.  We are confident that capitalism will survive thus so will our portfolios.  

Until next time,

Darin & Greg

 

 

ECONOMIC REVIEW[1]

• The Consumer Price Index (CPI) report for the month on April showed mixed results when it was released on Wednesday.
  • While monthly Core prices accelerated at a rate of 0.6%, faster than forecast (0.4%) and the previous month (0.4%), headline readings slowed for the first time in more than eight months.
  • CPI (year-over-year) contracted to 8.3% from 8.6% in March, as energy prices moderated, with monthly headline prices confirming the same at 0.3%, below last month (1.2%) and above forecasts (0.2%).
• The Producer Price Index (PPI) was on Thursday, confirming a slight ease in producer prices, which accelerated by only 0.5%, the first monthly reading below 1.0% this year.
  • This consensus-confirming reading led to a modest improvement in year-over-year figures, 11.0% versus 11.5% a month earlier.

 

How does this impact you?

• Impact of Inflation
  • While it may be tempting to focus on the positives in these reports (any good news on the inflation front is more than welcome in this rash of elevated readings), prices remain elevated across the economy and high inflation measures should be expected for the foreseeable future.
    • Contradicting the good news in headline figures, core CPI prices showed more substantial inflationary pressures as food (+0.9%), airline fares (+18.6%), and shelter (+0.5%), which makes up ~30% of total CPI, all drove the measure higher.
  • While producer prices did see continued increases in food and energy prices, similar to CPI readings, the primary drivers of inflation came from outside these typically volatile categories.

   A LOOK FORWARD¹

• Retail sales numbers release on Tuesday this week, and analysts forecast a 1.1% increase beyond last month’s 0.8% improvement.
  • Excluding vehicles, however, retail sales are expected to slow, growing 0.5%, down from a 1.5% increase in March.
• Building permits, housing starts, and the NAHB home builder’s index all publish this week, and each measure is forecast to decline marginally.
  • The exceptionally hot housing market should remain strong through its peak summer season, though decreasing affordability and supply chain issues may temper rising prices, helping to ease inflation.

 

How does this impact you?

• Impact of Retail Sales & Housing
  • Retail sales are one of the most direct links to consumer spending, and thus an extremely important metric to observe as consumer spending makes up nearly 70% of GDP.
  • Housing metrics through the summer will provide critical information regarding the effectiveness of the Fed’s financial tightening on inflation readings going forward.

MARKET UPDATE

Market Index Returns as of 5/13/221	WTD	QTD	YTD	1 YR	3 YR	5 YR
S&P 500	-2.35%	-11.03%	-15.12%	-0.76%	14.60%	12.99%
NASDAQ	-2.77%	-16.91%	-24.35%	-9.45%	16.53%	15.10%
Dow Jones Industrial Average	-2.08%	-7.00%	-10.81%	-3.58%	10.65%	11.45%
Russell Mid-Cap	-1.96%	-10.43%	-15.52%	-6.53%	10.99%	10.03%
Russell 2000 (Small Cap)	-2.50%	-13.30%	-19.83%	-16.52%	6.91%	6.68%
MSCI EAFE (International)	-1.41%	-10.40%	-15.70%	-11.63%	4.19%	3.44%
MSCI Emerging Markets	-2.60%	-11.81%	-17.96%	-20.56%	1.92%	2.38%
Bloomberg Barclays US Agg Bond	0.89%	-4.02%	-9.71%	-8.45%	0.14%	1.16%
Bloomberg Barclays High Yield Corp.	-1.21%	-5.85%	-10.41%	-7.43%	2.30%	3.16%
Bloomberg Barclays Global Agg	0.30%	-6.39%	-12.16%	-13.35%	-1.62%	0.20%

    OBSERVATIONS

• U.S. equities continued their move lower as indicated by the S&P 500 which was down -2.35% on the week.
• In the U.S., smaller sized companies underperformed their larger-sized counterparts, as the Russell 2000 shed -2.50%.
• International stocks as measured by the MSCI EAFE were negative again, down -1.41%, but outperforming domestic stocks.
• Emerging market stocks decreased with the MSCI EM retreating -2.60%.
• U.S. investment grade bonds were positive last week with the Bloomberg Barclays U.S. Aggregate Bond index up +0.89%.

 

• BY THE NUMBERS

FROM THE HIGH POINT - In the 91 trading days since closing at an all-time high on 1/03/2022, the S&P 500 has fallen 15.7% (total return) through last Friday 5/13/2022.  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).     

 

DO THE MATH - The S&P 500 is a cap-weighted index, i.e., the largest capitalized stocks carry a disproportionate impact on the index’s performance calculation.  As of the close of trading on Friday 5/13/2022, the 43 largest stocks in the index carries the same weight as the other 462 stocks in the index.  Note there are 505 stocks in the S&P 500 because 5 different stocks each have 2 share classes (source: S&P). 

 

STOCKS - From 12/31/2019 to 12/31/2021, the value of all US individual stocks increased by $19.5 trillion (+57%) to $53.4 trillion, before falling $5.1 trillion (10%) in the 1Q 2022 to $48.3 trillion (source: Siblis Research). 

 

HOW MUCH? - Fed Chairman Jerome Powell foreshadowed on 5/04/2022 the prospect of rate increases at each of the remaining 5 Fed meetings in 2022, including 0.50 percentage point increases at the next 2 meetings (scheduled for June and July).  Powell’s comments equate to 2.5 percentage point increases in 2022, matching the 2.5 percentage point rate hikes implemented by the Fed in 1994 or 28 years ago (source: Federal Reserve).   

 

 

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

 

 

 

Economic Definitions

CPI (headline and core): Consumer prices (CPI) are a measure of prices paid by consumers for a market basket of consumer goods and services. The yearly (or monthly) growth rates represent the inflation rate.

Producer Prices - PPI (headline and core): Producer prices (output) are a measure of the change in the price of goods as they leave their place of production (i.e., prices received by domestic producers for their outputs either on the domestic or foreign market).

Retail Sales: Retail sales (also referred to as retail trade) tracks the resale of new and used goods to the general public, for personal or household consumption. This concept is based on the value of goods sold.

Building Permits: This concept tracks the number of permits that have been issued for new construction, additions to pre-existing structures or major renovations. These statistics are based on the number of construction permits approved.

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

 

 

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. 4744731