Commentary for May, 2022

Hello all - we hope you had a nice May.

Most of the month was tough for investors as markets steadily declined.  However, solid gains the last full week of the month put stocks right back to where they started.  The Dow and S&P 500 were both flat on the month, rising 0.04%, and 0.01%, respectively.  It’s hard to get much flatter than that.  The Nasdaq, which has a higher concentration of tech companies, was down 2.1%. 

 

Here’s a closer look at the markets this month:

 

Until the last week of the month, the decline in stocks had been historic.  The Dow had seen eight-straight weeks of declines, which is the longest weekly streak of declines in 99 years.  Really!  

The S&P 500 and Nasdaq both had seven-straight weeks of declines, which is the first time that’s happened since 2001.   

 

Thankfully, the final week of the month was a large enough increase to wipe out most of the earlier losses.

 _____

 

 

The Fed

A lot of concern remains around the Fed as they pull back on their stimulus.  The printing of money and rock-bottom borrowing rates has fueled the market rise in recent years, so its only logical for the removal of stimulus to cause the markets to fall.  

This month, they raised interest rates again.

 

 

The Fed also made comments that while they would keep pulling back on stimulus, they wouldn’t pull back at a very fast pace.  This reassured investors who had feared worse and caused the biggest gain in the markets after a Fed meeting since 2011.

 

The excitement was short-lived, though.  The following day stocks sold off even more than they rose on the excitement.  

It appears investors figured that while the Fed won’t pull back on stimulus at a faster pace, they’ll still be pulling back, and they may have to do it for a longer time.  Stocks fell sharply as a result.

This is an interesting chart showing how unlikely it is to have such a strong day, only to be followed by such a weak day.

_____

 

 

Inflation

Inflation remains a big topic.  Data out this month showed inflation finally ticking lower on a year-over-year basis. 

 

On a monthly basis, however, inflation is running high. 

 

The story was the same with inflation at the business level (the PPI), where inflation moved slightly lower on a year-over-year basis. 

 

The monthly PPI readings on inflation look very bad. 

 

While some companies have managed to weather the inflation storm, others have not.  Big name retail companies like Wal-Mart and Target saw sharp drops in their stock prices after issuing warnings about high inflation.

_____

 

 

Other economic data

Economic data released this month was mostly negative.  

Both the manufacturing and service sectors of the economy continued to decline.

 

We don’t talk about home sales often, but housing is starting to show some weakness.  

Despite (or perhaps because of) record high prices for homes and rising mortgage rates, home sales are slowing.  The sale of new homes saw a massive drop and stands at the same level as two years ago.  Existing home sales are also starting to show weakness.

 

Retail sales have been a bright spot as they rose for another week, although this may be because people are spending more for these items.

 

Durable goods - which are items with a longer life, like a phone or dishwasher – rose higher. 

 

Sentiment among the public moved lower again.

 

Small business owners continue to be very pessimistic.

 

The same small business survey noted that inflation remains a big concern for them.

_____

 

 

Where does the market go from here?

We saw a nice rise late in the month, but it put stocks at a level that doesn’t look good for new money, at least for the short term.  

It’s too early to tell if this is the bottom for stocks, but a lot of the sentiment indicators we follow show we’re due for a move higher.  A lot of the bad news has been priced in and while surprises are always possible, the investing environment looks less scary. We don’t see stocks rising like they did before, but we don’t see the decline continuing, either.  We think it might be a rocky grind sideways from here.  



This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for April, 2022

Hello all - we hope you had a better April than the markets did.

April is historically one of the better months of the year, however, this April turned out to be one of the worst.  The Dow lost 4.9% and the S&P 500 fell 8.8%, which was their worst month since the height of the pandemic.  The Nasdaq had its worst month since 2008 with a 13.3% drop.  This was also the Nasdaq’s 12-worst month ever.

 

 

Here’s a closer look at the month:

 

 

Volatility picked up this month, with the markets seeing large daily swings.  Here’s a look at how much stocks moved every day.  We’re nearing volatility levels last seen at the height of the pandemic.

 

Bond holdings continue to lose value, too, as rates rise (when yields on bonds rise, their prices fall).  Below is a bond index ETF’s we use a lot - it’s easy to see how much the prices have fallen.

 

While a lot of markets are falling, there are others that continue to rise.  Many commodity markets keep climbing (which is why there are higher prices for things like food or gas).  

The United States dollar has strengthened very quickly, too.  There a several reasons for this, but a lot of it has to do with the Fed.  They continue to talk about reducing stimulus and raising borrowing rates.  Less printing of money, therefore, makes our currency look stronger.  Other countries aren’t doing this - in fact, just this week Japan announced they will be printing even more money as stimulus. 

 

_____

 

 

Corporate Earnings

We are in the thick of corporate earnings results from the first quarter.  The results so far have been pretty decent and earnings have grown about 7.5% over the past year, according to Factset.  

Some companies had surprisingly bad results, like Amazon who posted its first quarterly loss in seven years.  However, about 80% of companies who have reported so far have done better than analysts estimated.  

_____

 

 

Inflation

Inflation remains a big topic.  Data out this month showed inflation reaching another 40-year high.

 

One of the issues we have with the inflation data is the way it is measured - the calculation seems to go out of its way to minimize inflation.  

One example we came across this month is the undercounting of the housing costs.  Zillow put out their data on housing costs (it’s actually a rent-equivalent), showing a 17% increase.  However, the CPI calculation for housing shows a rise of just over 4%.  Housing is a big component of the CPI calculation, making up more than 40% of the index, so this has a big impact on the overall number.  

In the real world, inflation is much higher than the reported 8.5%.

 

As for inflation at the business level - before they pass on the hikes to consumers - the inflation remains at a record high.

 

_____

 

 

Other economic data

Economic data released this month was mostly negative.  

We’ll start with the big GDP report, which measures the strength of the economy.  Economists were expecting a slight growth in the economy, but the result was actually negative for the quarter This was the first negative quarter since the peak of the pandemic (also, two negative quarters are defined as a recession, so we may be halfway there).  With stagnant growth and high inflation, we’re bound to hear the word “stagflation” more and more. 

 

The manufacturing portion of the economy continued to decline, but the service sector actually showed an increase.

 

Retail sales showed another gain…

 

 

…but excluding gas at the pump, retail sales were actually lower.

 

 

Durable goods - which are items with a longer life, like a phone or dishwasher - turned higher. 

 

Sentiment among the public turned lower.

 

Small business owners continue to be very pessimistic.

 

 

The same small business survey noted that inflation remains a big concern for them.

_____

 

 

Where does the market go from here?

In the short term, the market looks very oversold (or cheap) and due for a bounce.  However, the market has looked cheap at various times recently and the selling has continued.  It might not be a bad time to dip a toe in once we see a little more strength.

We aren’t too optimistic on the longer term.  The days of the market steadily rising are probably over as the Fed removes more and more of its stimulus and economic growth slows.  There may be buying opportunities from time to time, but we think they will be short-lived.  

Finally, here’s a look at some of the indicators we follow, which are all showing the market on the cheap side:

 

This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for March, 2022

Hello all - we hope you had a nice March.

It was a remarkable turnaround for the markets, with stocks rising sharply in March.  The Dow rose by 2.2%, the S&P 500 gained 3.7%, and the Nasdaq, which has a high concentration of technology companies, was up 3.5%.

The end of March also means the end of the first quarter, which was the worst quarter in two years.   Over this period, the Dow fell 4.6%, the S&P lost 4.9%, and the Nasdaq suffered a 9.1% drop. 

 

Here’s a closer look at the markets this month:

 

While stocks were a big story, the bond market was an even bigger story this month.

Interest rates on bonds shot higher at a pace only seen two other times this century.

 

What this means is that our record low borrowing costs are rising very quickly.  A good example is mortgage rates.  It wasn’t long ago that average mortgage rates were below 3%, but they’ve very quickly jumped to almost 5%. 

 

This also means the bond holdings in your portfolio have quickly fallen in value.  When yields on bonds rise, their prices fall.  Below is one of the bond index ETF’s we use a lot - it’s easy to see how much the prices have fallen.

 _____

 

 

What caused the big swings in these markets this month?  

For the stock market, a lot of attention was focused on the fighting in Ukraine.  The outlook for the war improved as the month went on - whether that will turn out to be accurate or not remains to be seen - and it gave the markets a reason to rise.  Wars have historically seen stocks fall initially, but rally later.  That may be the case again here.  

On the other hand, the big moves in the bond market were largely driven by the Fed.  

The Fed held one of their policy meetings this month, where they announced an increase in interest rates.  This is the first increase since the pandemic struck, when they lowered rates as a form of stimulus to make borrowing easier.  Now they must raise rates to keep inflation from rising too high (although they are pretty far behind the curve here).

 

Investors see many more rate increases coming this year.  Current market projections show nine rate hikes of 0.25% this year, but there may be a few 0.50% rate hikes along the way. 

 

These projections have bond investors worried rates will keep rising and bond prices falling, which helped cause the sell-off in bonds we saw this month.

_____

 

 

On the topic of inflation, the CPI inflation metric again came in at the highest level in 40 years.

 

Inflation at the business level (the PPI) stands at its highest level ever.

 

 

High oil and gas prices have played a large part in the increase in inflation.  In the chart below, we can see how oil prices have shot higher this year. 

 

Interesting to note, and probably not surprising, spikes in oil prices have often seen recessions follow. 

 _____

 

 

As for other economic data out this month, the manufacturing sector of our economy strengthened, but the service sector dropped sharply.

 

Retail sales were higher.

 

Durable goods - which are items with a longer life, like a phone or dishwasher - fell sharply last month. 

 

Sentiment among the public ticked higher:

 

On the other hand, small business owners are much less optimistic.

 

The same small business survey noted that more and more businesses are worried about rising inflation.

 _____

 

 

Where does the market go from here?

In the short term, we think the overall market looks a little expensive.  The month closed with some selling and we wouldn’t be surprised to see this continue.  It doesn’t look like a good time to put new money in the market in the short term.

We aren’t too optimistic on the longer term, either.  The days of the market steadily rising are probably over as the Fed removes more and more of its stimulus and economic growth slows.  There may be buying opportunities from time to time, but we think they will be short-lived.  


This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.