Major topics affecting stocks last week:
Wall Street continued its losing streak as fears grew that inflation was causing consumers to pull back on spending, setting the stage for an imminent recession. At its lows on Friday, the S&P 500 was down roughly 20.9% from its January intraday high, exceeding the 20% threshold signifying a “bear market”. The index’s biggest declines came on Wednesday, when it suffered its biggest daily loss since June 2020. The Dow Jones Industrial Average shed almost 1000 points last week, declining -2.9% to 31,262. The technology-heavy Nasdaq Composite declined for a seventh consecutive week giving up -3.8% finishing at 11,355. By market cap, the large cap S&P 500 ended down -3.0%, while the mid cap S&P 400 index fell -1.9% and the small cap Russell 2000 finished the week down -1.1%.
Major international markets finished the week mixed, with Europe lower and Asia higher. Canada’s TSX rebounded 0.5%, while the United Kingdom’s FTSE 100 reversed last week’s gain and fell -0.4%. On Europe’s mainland, France’s CAC 40 and Germany’s DAX fell -1.2% and -0.3%, respectively. Major markets in Asia finished the week in the green. China’s Shanghai Composite finished up 2%, while Japan’s Nikkei added 1.2%. As grouped by Morgan Stanley Capital International, developed markets rose 1.2%. Emerging markets gained 1.6%.
Source: J.P. Morgan Asset Management, Weekly Market Recap, 5/23/22
Precious metals finished the week in the green given the continued weakness in the equity markets and rising inflation. Gold rose 1.9% to $1842.10 per ounce, while Silver gained 3.2% to $21.67. Oil finished the week mixed with Brent crude oil rising 1.3% to $112.90 per barrel, while West Texas Intermediate ticked down -0.2% to $110.28. The industrial metal copper, viewed by some analysts as a barometer of world economic health due to its wide variety of uses, finished the week up 2.4%.
Source: J.P. Morgan Asset Management, Weekly Market Recap, 5/23/22
Last week began with hopes of a recovery as markets traded higher from Friday, May 13th, through last Tuesday. Last Wednesday, however, saw the heaviest selling as the S&P 500 Index recorded the worst daily performance since June 2020. First quarter earnings season wrapped up last week with earnings results from the retail industry, including Wal-Mart, Home Depot, and Target. Many of the reports showed strong revenue growth as sales exceeded forecasts. Unfortunately, most retail companies also showed higher costs than expected due to inflationary trends.1
Recall that the third Friday of every month is the expiration date for the various options traded in markets. Options expiration weeks have historically carried added volatility for the market and last week was no exception. This month showed a large outstanding balance of put options (options typically used to bet the market is moving lower) that had to be settled with purchases of underlying stocks and indexes. The closing of these option contracts resulted in strong buying of stocks on Friday afternoon offering temporary relief for stock indexes.2
Source: J.P. Morgan Asset Management, Weekly Market Recap, 5/23/22
We often use the 50-day moving average (50DMA) to monitor short-term trends for stocks. Major stock indexes will trade above their 50DMA most of the time during a bull market. When market weakness persists, we measure how far the index trades below the 50DMA to understand the depth of a market correction. The S&P 500 Index remains weak trading close to two standard deviations below its 50DMA. Less than 5% of stocks in the index still trade more than one standard deviation above their respective 50DMA while two-thirds of stocks are more than one standard deviation below their 50DMA. Signs of weakness remain broadly across U.S. markets.3
Source: Bespoke Investment Group, Morning Lineup, 5/23/22
The disappointment in retail earnings last week sunk major retailers found in the consumer staples sector sending the sector down more than 8.5% for the week. Consumer staples was one of only two sectors to trade above its 50DMA prior to last week but the losses sent the sector to deeply oversold territory. The energy sector remains the only sector to trade above its 50DMA as the supply/demand for energy has kept energy prices high supporting companies in the sector.4 The strength in metals pushed gold, silver, and copper closer to their respective 50DMA’s.
Source: Bespoke Investment Group, Morning Lineup, 5/23/22
Market history has not been a reliable guide so far in 2022, however, we are returning to a period where stocks typically generate positive returns. The S&P 500 Index has shown positive returns nearly 90% of the time over the next three months during the last ten years. The index has shown an average return just below 5% during that period with strength in health care, technology, and real estate.
Source: Bespoke Investment Group, Morning Lineup, 5/23/22
Interest rates for longer maturity Treasuries declined last week as investor grappled with thoughts of an economic recession. There was little economic news reported but we heard many interviews with Federal Reserve governors and the Treasury Secretary stating that the task of reducing consumer prices by raising interest rates and reducing liquidity could produce uncertain results. You will hear unending debates about a “soft landing” being possible as the Fed attempts to slow demand from consumers without sending the economy into recession. Current economic growth has been slowing after the stimulus-induced growth bubble of the last two years. Consumer spending has shifted over the last two months from goods to services, including higher spending on airfares, hotels, and restaurants.5
Source: J.P. Morgan Asset Management, Weekly Market Recap, 5/23/22
The Federal Reserve Bank of Atlanta measures current economic growth using a variety of tools hoping to project growth over the coming quarters. While the first quarter GDP report showed some unusual one-time variables leading to a negative GDP report, expectations are for a rebound in the second quarter to a 2.4% growth rate.6 Other Fed models, including the New York Federal Reserve Bank, have forecast the probability of recession at less than 4% over the next twelve months. Higher consumer prices for gasoline and food could curb demand in the future but it does not appear to affect summer travel plans. According to Bespoke Investment Group, recent pricing for hotels and restaurants has not slowed consumer traffic.7
Source: Bespoke Investment Group, Fixed Income Weekly, 5/18/22
If you would like to schedule time to discuss your portfolio or the markets in detail, please call our office at (281)616-5935 or send an email to Cameron.malott@engravewealth.com. We are continually grateful for the confidence you have placed in our team. We look forward to serving your family in the years to come!
Engrave Wealth Partners Investment Committee
Bill Day, CFP®, CIMA Taylor Parker, CFP® Brian Jones, CFP®
Greg Parker Preston Baird
Paul Courtney, CFA Aaron Dirlam, CFA
FOOTNOTES AND DISCLAIMERS
Equity Price Levels and Returns: All returns represent total return for stated period. Index: S&P 500; provided by: Standard & Poor’s. Index: Dow Jones Industrial 30 (The Dow Jones is a price-weighted index composing of 30 widely traded blue chip stocks.) ; provided by: S&P Dow Jones Indices LLC. Index: Russell 2000; provided by: Russell Investments. Index: Russell 1000 Growth; provided by: Russell Investments. Index: Russell 1000 Value; provided by: Russell Investments. Index: MSCI – EAFE; provided by: MSCI – gross official pricing. Index: MSCI – EM; provided by: MSCI – gross official pricing. Index: Nasdaq Composite; provided by: NASDAQ OMX Group.
MSCI EAFE is a Morgan Stanley Capital International Index that is designed to measure the performance of the developed stock markets of Europe, Australasia, and the Far East.
Key Interest Rates: 2 Year Treasury, FactSet; 10 Year Treasury, FactSet; 30 Year Treasury, FactSet; 10 Year German Bund, FactSet. 3 Month LIBOR, British Bankers’ Association; 3 Month EURIBOR, European Banking Federation; 6 Month CD, Federal Reserve; 30 Year Mortgage, Mortgage Bankers Association (MBA); Prime Rate: Federal Reserve.
Sector Returns: Sectors are based on the GICS methodology. Return data are calculated by FactSet using constituents and weights as provided by Standard & Poor’s. Returns are cumulative total return for stated period, including reinvestment of dividends. Style Returns: Style box returns based on Russell Indexes with the exception of the Large-Cap Blend box, which reflects the S&P 500 Index. All values are cumulative total return for stated period including the reinvestment of dividends. The Index used from L to R, top to bottom are: Russell 1000 Value Index (Measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values), S&P 500 Index (Index represents the 500 Large Cap portion of the stock market, and is comprised of 500 stocks as selected by the S&P Index Committee), Russell 1000 Growth Index (Measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values), Russell Mid Cap Value Index (Measures the performance of those Russell Mid Cap companies with lower price-to-book ratios and lower forecasted growth values), Russell Mid Cap Index (The Russell Midcap Index includes the smallest 800 securities in the Russell 1000), Russell Mid Cap Growth Index (Measures the performance of those Russell Mid Cap companies with higher price-to-book ratios and higher forecasted growth values), Russell 2000 Value Index (Measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values), Russell 2000 Index (The Russell 2000 includes the smallest 2000 securities in the Russell 3000), Russell 2000 Growth Index (Measures the performance of those Russell 2000 companies with higher priceto-book ratios and higher forecasted growth values).
Past performance does not guarantee future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss.
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