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‍Major topics affecting stocks last week:

·        April CPI report – so much for the idea of “slowing growth”. Continued pressures…

·        Is U.S. economic recession imminent? The negative GDP report is misleading

·        U.S. Stock Index lows for the year last week

Despite an end-of-week rally, the major U.S. equity benchmarks recorded another week of losses.  It marked the sixth consecutive weekly decline for the both the S&P 500 index and the Nasdaq Composite, and the seventh for the Dow Jones Industrial Average—its longest stretch since 2001.  At its lows on Thursday, the S&P 500 was down nearly 18% from its peak, just above the -20% threshold that commonly defines a bear market.  The Dow Jones Industrial Average shed 703 points finishing the week at 32,197—a decline of -2.1%.  The technology-heavy NASDAQ Composite retreated ‑2.8% to close at 11,805.  By market cap, the large cap S&P 500 retreated -2.4%, the mid cap S&P 400 declined -2.0%, and the small cap Russell 2000 gave up -2.5%.

Major international markets finished the week mixed.  Canada’s TSX retreated -2.6%, while the United Kingdom’s FTSE 100 ticked up 0.4%.  On Europe’s mainland, France’s CAC 40 and Germany’s DAX rose 1.7% and 2.6%, respectively.  In Asia, China’s Shanghai Composite gained 2.8%, while Japan’s Nikkei ended the week down -2.1%.  As grouped by Morgan Stanley Capital International, developed markets ended the week down -0.4%.  Emerging markets fell -1.1%.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 5/16/22

Precious metals had a difficult week with gold retreating -4.0% to $1808.20 an ounce, and Silver plunged -6.1% to $21.  Energy finished the week mixed with West Texas Intermediate crude oil rising 0.7% to $110.49 per barrel, while Brent crude shed -0.9% to $111.41.  The industrial metal copper, viewed by some analysts as a barometer of world economic health due to its wide variety of uses, ended the week down -2.2%.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 5/16/22

Many analysts were hoping that the April Consumer Price report released last week would be a catalyst for a rebound in stock prices. Unfortunately, that was not the case as the inflation report showed stubborn increases in prices. Recall that the Consumer Price Index (CPI) is a twelve-month rolling look at price changes in the U.S. economy recently reflecting changes from May 2021 until April 2022. Economists were hoping that dropping off April 2021, which showed a large increase in prices, would help the twelve-month rolling average decline – that did not happen.1

The current CPI report did show slowly moderate price relief for food and energy costs, however, the price of housing and new cars bumped the report higher and overall price increases remained at +8.3% year-over-year.2 Stock prices declined hard on the news and would have shown a larger weekly loss except for Friday’s rebound. The selling hit most areas of the market equally hard with losses ranging between 2-4%.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 5/16/22

U.S. stock indexes recorded their lowest point for the year last week as the S&P 500 Index dropped 18% from its prior record high on January 4th. The NASDAQ Index has now declined 28% from its prior all-time high with more than 80% of stocks in the index down at least 20%.3 The recent selling has sent both indexes to extreme oversold levels, trading more than two standard deviations below their respective 50-day moving averages. Only a small handful of stocks have been able to avoid the selling with 8% of the S&P 500 Index trading above their 50-day moving average.

Source: Bespoke Investment Group, Morning Lineup, 5/16/22

Last week saw most sectors decline for the week with a continuation of the pattern showing defensive sectors outperforming cyclical sectors. Demand for defensive sectors reflects the remaining concern investors have for market direction. All sectors except for energy and consumer staples remain well below their 50-day moving average. Stock valuations have tumbled during the recent selloff – the Price/Earnings Ratio (P/E) for the S&P 500 Index has declined to 19.5 from a high of 26 while the 100-year average remains closer to 16.4 Recent earnings results have helped boost the P/E ratio while stock prices have fallen.

Source: Bespoke Investment Group, Morning Lineup, 5/16/22

The S&P 500 Index is closing in on a favorable historical period for stocks with the average three-month return over the last ten years at 4.22%. The Index has shown gains during the next three months better than 80% of the time during that same time. The top performing sectors have traditionally favored health care, technology, and real estate.

Source: Bespoke Investment Group, Morning Lineup, 5/16/22

Interest rates fell unexpectedly last week after the CPI report was released. The “higher for longer” inflation report sent stocks down, but bond investors are seeing recent reports as a potential peak in consumer prices.5 Recall that short maturity bonds, especially short-term Treasury bills, will see interest rates affected primarily by the Federal Reserve’s interest rate policy. Longer maturity bonds, primarily 30-year Treasury bonds, will have interest rates that are affected by changes in economic growth and/or inflation expectations. The 30-year U.S. Treasury Bond rate has risen from 1.90% at the end of 2021 to a high of 3.28% a few weeks ago based on rising inflation expectations.6 Any potential decline in inflation expectations should help long-term interest rates come back down in coming months.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 5/16/22

There have been many media outlets promoting the idea that recession is “just around the corner” after seeing the first quarter GDP report in negative territory. We acknowledged at the time that this report had some conflicting numbers. Economists acknowledge the largest component of GDP is consumer spending, which reported a healthy increase of 2.7% annually for the quarter. The concern was a spike in the trade deficit showing significantly higher imports than exports.7

The rise in imports was largely due to rebounds in the supply chain issues after the economic shutdowns in 2020. Many businesses used the opportunity to replace inventories after consumer demand rose when the economy reopened. The unusual trade deficit situation took GDP from a positive reading to a negative reading. Many economists believe the trade deficit will improve and GDP will turn a modest reversal for the second quarter.8

Source: Bespoke Investment Group, Fixed Income Weekly, 5/11/22

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

1.        Bespoke Investment Group, The Bespoke Report, 5/13/22

2.        First Trust Advisors, Brian Wesbury, Data Watch, 5/11/22

3.        Bespoke Investment Group, The Bespoke Report, 5/13/22

4.        Saut Strategy, Andrew Adams, Charts of the Week, 5/11/22

5.        Bespoke Investment Group, The Bespoke Report, 5/13/22

6.        Bespoke Investment Group, The Bespoke Report, 5/13/22

7.        WolfStreet.com, Wolf Richter, That Q1 GDP Drop Was a Freak Event, 5/15/22

8.        WolfStreet.com, Wolf Richter, That Q1 GDP Drop Was a Freak Event, 5/15/22

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.