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2020 Financial Markets Update

Week in Review: May 20, 2022

May 23, 2022

Recap & Commentary

Markets ended the week lower as investors continued to fret about the Federal Reserve and the increasing chances of a recession.  Friday saw the S&P 500 fall into bear market territory (down 20% or more from record high) intraday, before rallying in the final hour to close flat, thus avoiding “officially” entering bear market territory. Nonetheless, the week’s 3.1% decline for the S&P 500 marked the seventh consecutive week of losses, the longest such stretch since 2001, and left the S&P 500 down 18.7% from its record-high close on January 3.

Growing concerns of a recession were exacerbated by comments from Federal Reserve Chair Jay Powell and disappointing earnings reports from notable retailers. Speaking at an event on Tuesday, Powell reaffirmed the Fed’s commitment to lowering inflation, even if doing so resulted in some “pain.” “Restoring price stability is an unconditional need. It is something we have to do.” Powell further stated that the Fed needs to see inflation coming down in “a convincing way” and that until it does it will ‘keep going’ with rate hikes.”

Earnings results from Target and Walmart raised concerns about the impact of rising prices on corporate earnings and, perhaps more importantly, the consumer. While both companies reported better-than-expected sales, both missed earnings expectations due to inflation, supply chain issues, and shifting spending patterns as consumers changed their focus from discretionary items to staples. The latter raised concerns about companies’ abilities to continue to pass along costs to consumers as well as the overall health of the consumer.

Economic Commentary

Consumers continued to spend in April, a positive for second quarter growth, with headline retail sales rising 0.9%, while March was revised from 0.5% to 1.4%.  The data, which is not inflation adjusted, reflects both increased spending as well as the effects of higher prices. Excluding gasoline sales, which dipped slightly in April, total sales increased 1.3%. The data provided an offset to concerns about the consumer raised by Target’s and Walmart’s earnings reports.

Housing data in April continued to decelerate, no doubt impacted by rising rates, which have risen to 5.25%, from 3.1% at the start of the year.  Existing home sales declined for a third consecutive month to an annualized rate of 5.61M, the slowest pace since June 2020. Despite the slowing pace, the median price of an existing home rose ~15% from a year ago to a new record high of $391.2K. Sales may likely fall further in coming months as April’s data reflected contracts signed in February and March when rates remained below 5%.

Contrary to existing home sales, housing starts were effectively unchanged and remain 14% higher than a year ago. Permits, a leading indicator of future activity, were down just over 3% as higher rates appear to be sapping some demand.  Weekly mortgage rate applications fell 11%, marking the ninth decline over the past 12 weeks.

Of Note

According to industry group FactSet, through May 12, 445 (89%) S&P 500 companies had reported 1Q22 earnings.  Of those, 85% had mentioned the word “inflation” at least once during their earnings call, which is a record high.

S&P 500-3.1%
Small Caps-1.1%
Intl. Developed1.4%
Intl. Emerging3.1%
U.S. Bond Market0.6%
10-Year Treas. Yield2.85%
U.S. Dollar-1.8%
WTI Oil ($/bl)$113
Gold ($/oz)$1,845

The Week Ahead

  • Markit PMI
  • New Home Sales
  • Pending Home Sales
  • Durable Good Orders
  • PCE Inflation
  • Consumer Confidence
  • Consumer Spending & Personal Income
  • Weekly Jobless Claims

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