MARKET RECAP

The S&P 500 index had a big week as it rallied by 6.4%, the Dow gained 5.4% and the Nasdaq was up by 7.5%. On Friday, the S&P has its biggest rally in more than two years, up by 3.1%. A lot of the rally was powered by falling commodity prices and signs of a slowing economy, which investors took to mean lower inflation and less of a need to raise interest rates as high as might have been feared. As an example, cooper fell 65 on the week and is close to a one-year low, down 16% over the last three weeks.

The University of Michigan’s consumer sentiment survey fell to 50, the lowest readying ever, and this survey dates back to 1952. 79% of consumers were pessimistic about future business conditions, the highest since 2009, and 47% said that inflation was “eroding their living standards.” Consumer expectations of long-run inflation fell from 3.3% to 3.1% over the next five years, that is back within the 2.9% to 3.1% range that has been measured for most of the last 10-months. For the next year, consumers expect inflation of 5.4%.

New-home sales were up by 10.7% in May while sales of previously owned homes was down by 3.4%. The rate on a 30-year mortgage is now at 5.81%, the highest level since 2008. Ian Shepherdson, chief economist of Pantheon Macroeconomics wrote that “The housing market is rolling over, and sales will fall sharply over the next few months.”

The US composite purchasing managers index fell to a five-month low of 51.2 in June from 53.6 in May.

MARKET RECAP

• The bear market is now in full swing, with most expecting more downside to come. The S&P 500 dropped by 5.8% this week, the biggest decline since the pandemic hit. The S&P has dropped 10 of the last 11 weeks. Wilshire Associates estimates the market cap of US equities is down by 12.5 trillion this year. The crypto market was even worse, bitcoin fell by 30% and there are signs that some crypto lending platforms are freezing up. Celsius Networks put a pause on all withdrawals.
• The Fed raised rates by 0.75% and said they expect the economy to slow significantly. It was the biggest increase since 1994. The Fed is now expected to raise rates by another 1.75 percentage points over the remainder of this year, to about 3.75%.
• Much higher interest rates increase the chances of a deeper recession significantly. P/E ratios will decline as the interest rates increase, and to make matters worse, the “E” in the P/E will fall due to the recession. And all of this is further complicated by the war in Ukraine, which has reduced energy and food supplies, and by broken supply chains, which have been damaged further by tight Covid restrictions in China. Almost every analyst out there predicts more downside to come. At least over the next year or so.
• Models at Bloomberg Economics place the chance of a recession by 2024 at 72%.
• Meanwhile, commodity prices fell this week. Oil was down by 8.98% this week and energy companies fell hard. The XLP was down by 17.16% for the week and is 20% off its high. Cooper was off by 6.6% for the week. Residential investment is down by about 20% for the quarter.
• $2 trillion of cyptocurrency value has been erased since November. Bitcoin is off 70% from its high.
• According to Mark Hulpert, if “you bought stocks on the day the S&P 500 closes below the 20% loss threshold.. on average you would have done very well…and you wouldn’t have had to wait that long to do so. Over the 12 months following your buys, your average total return would have been 22.7%. Click for the article.
• Retail spending fell in May by a seasonally adjusted 0.3% compared to April. It was the first decline in over a year. Housing and auto sales were both down. The savings rate was at its lowest level in 14 years, indicating that consumers are dipping into savings to offset inflation.

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MARKET RECAP

Stocks got hit on Thursday and then again on Friday, falling 2.4% on Thursday and almost 3% on Friday. Declines were only minor on Thursday until the sell-off in the final hour which was steep in anticipation of the Friday inflation report. The inflation report turned out to be worse than expected, the CPI was up by 8.6% compared to the prior May and was the biggest increase since December of 1981. Energy was up by 34.6% and groceries by 11.9%. The report was so bad that analysts began calling for a 1% increase in interest rates at the Fed’s next meeting as opposed to the half-point that the Fed has already signaled. For the week, US stocks were down by 5.06%, international by 4.11%, and bonds by 1.53%.

The ECB said it would increase interest rates from minus 0.5% to zero or higher by September with more increases after that.

Multinational companies have taken losses of about $59 billion from either closing up shop in Russia, cutting back, or just being impacted by their diving economy.

The University of Michigan consumer sentiment gauge fell to a record low of 50.2.

The 2-year treasury is now yielding greater than 3% (3.047%).

Home price increases are starting to slow. Active home listings have increase year over year for five weeks in a row according to Realtor.com and the growth of median listing price has slowed. New home sales are down 16.6%.

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MARKET RECAP

• US stocks fell by 1.07% for the week. Interest rates were up, the yield on the 10-year treasury increased by 22 basis points to 2.96%.

• Payrolls were up by 390,000 in May, down from 436,000 in April, and the slowest pace of growth since April of 2021. The unemployment rate was flat at 3.6%. Wages were up by 5.2% compared to last year, down from 5.5% in April. Two million people from age 25 to 54 have joined the labor force since September. The labor force participation rate is now 62.3% up from 62.2% in April but still lower than the pre-pandemic February 2020 number of 63.4%.
• Jamie Dimon of JP Morgan said, in reference to the economy, “That hurricane is right out there down the road coming our way, we just don’t know if it’s a minor one or superstorm Sandy. You have to brace yourself.” Bank of America CEO Brian Moynihan has a more sanguine outlook and said that customers are not talking about recession. Elon Musk said he has a “super bad feeling” about the economy.
• Tesla announced it would cut 10% of salaried jobs.
• Existing-home sales fell by 5.9% in April from the previous year.

MARKET RECAP

MARKET RECAP

• A late Friday comeback saved the S&P 500 from closing 20% below its January high. The index is down 18.7% from its January 3rd high. The Nasdaq is down by 28.2%. For the week, the overall US market fell by 2.78%, but international stocks managed a 1.35% rally. Bonds were up by 0.63% as the 10-year treasury yield fell by 15 basis points to 2.78%.
• The Dow closed lower for the 8th week in a row, the last time that happened was in the Great Depression.  The S&P 500 and the NASDAQ are down seven straight weeks, the longest streak since 2001. The main fear driving prices lower is now the threat of a recession as opposed to higher interest rates.
• A recession is on the way according to more and more executives and government officials. Wells Fargo CEO Charlie Scharf said “It’s going to be hard to avoid some kind of recession. Former Fed Chair Ben Bernanke said “Even under the benign scenario, we should have a slowing economy.” Everyone is in agreement that two things are certain in the near and intermediate term – higher prices and higher unemployment – stagflation.
• The fear of a recession is also starting to get priced into bond markets. The yield on the 10-year treasury peaked two weeks ago and has fallen as fears of a recession are starting to rise. Even some booming commodities are falling in price, nickel is down by 42% and copper is down by 13% since the March highs. Both metals benefit from a strong economy.
• Don’t look now but initial claims for unemployment insurance, while still at historically low levels, has started to turn up in recent weeks.
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https://www.bloomberg.com/news/articles/2022-05-15/luna-crash-this-crypto-insider-warned-of-terra-ust-s-collapse?sref=BT5C1Eq6

MARKET RECAP

• Equities fell by 2.45% in the US. However, stocks had a big Friday rally, with the NASDAQ up by 3.8% and the S&P 500 by 2.4%. That followed a late Thursday rally. From the Thursday low to the Friday close, the S&P 500 rallied by 4.3%. Up volume represented more than 90% of the overall volume on Friday, a somewhat rare occurrence that has often (not always) been associated with the end, or short-term end, of bear markets.

• From it’s intraday high on January 4th to its intraday low on May 12th, the S&P fell by 19.92%, about as close to a bear market as you can get (normally defined as a 20% drop).
• The consensus everywhere is that there is more downside to come.
• The S&P 500 has fallen for six straight weeks, the last time that happened was during the 2011 European debt crisis.
• Investors are more and more coming to the belief that a recession is likely. Fed Chair Jerome Powell said on Thursday that getting inflation under control could case some short-term pain to the economy.
• The producer-price index increased at an 11% annual rate in April, down from the month prior but higher than the consensus estimate. The CPI was up by 8.3%, down from 8.5%, but there is little evidence that inflation has peaked. The April decline in energy prices has reversed, and oil prices are close to highs, and inflation in the service sector is ramping up. One spot of good news, prices of soybeans should drop this year on higher supply and lower demand.
• In what might be a sign of a turn in hiring, some tech companies have indicated their fast pace of hiring is coming to a pause. Twitter, Amazon, Uber, Facebook and other have indicated they are either freezing or slowing down hiring. Carvana and Peloton have announced layoffs.
• The cryptocurrency stablecoin TerraUSD, designed to always trade at $1, ended the week at 13 cents. Even in the world of digital assets, or maybe more so in the world of digital assets, a run on the bank (without the Fed backing you) is almost impossible to stop. Terra’s sister currency Luna, fared even worse, it was trading at less than one-half cent, down from $60 on Monday.
• Elon Musk’s deal for Twitter is on hold, Musk puts the blame on the number of fake accounts. Twitter shares were already substantially below the $54.20 offer price (around $45) reflecting a belief that the deal wouldn’t go through.

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MARKET RECAP

• The overall US markets fell by 0.45%, but the S&P 500 was somewhat flat, down by 0.16%, the NASDAQ was down by 1.28%. International stocks fell by 2.27% and bonds were off by 1.09%. The yield on the 10-year rose by 23 basis points to 3.12%.
• The NASQAQ (see below) is down 24% from its November 19th high, and the S&P 500 is down 14% from its January 3rd  high. Watch CNBC, read Barron’s, etc, the consensus is that there is more downside to come. That, of course, doesn’t necessarily mean that will happen, if anything, it could be a contrary indicator that we are getting closer to the bottom. Time will tell.
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• With equity prices down, and interest rates up, CurrentMarketValuation.com runs an analysis of various valuation models, taking a long-term view, and in terms of the S&P 500 versus the 10-year, they rate the S&P as fairly valued. While the S&P is 1.3 standard deviations above its trendline, interest rates are 1 standard deviation below, netting out at a fair valuation. That trade-off could change though, if interest rates continue to advance and/or earnings decline.
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• A look at the chart below, which shows the p/e of the S&P 500 as well as the 10-year, comparing to 2013 as an example, the 10-year was 3.04% compared to 3.05% today, and the p/e was 16.85 versus 18.12 today. That would imply another 7% on the downside assuming interest rates and earnings projections remained the same. But that is just one data point.
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• The Fed raised rates by 0.5% and said they would sell down the balance sheet by $45 billion per month to start and then by $90 billion per month starting in a few months.
• Former Treasury Secretary Larry Summers, in a WSJ interview, said there are substantial economic risks to the economy at this point and that a combination of high inflation and low unemployment has historically led to a recession within two years.
• The labor market remains strong with 428,000 new jobs added in April making it 12 straight months of 400,000 plus gains. The unemployment rate stayed steady at 3.6%. Wage growth came in a 5.5% just off from 5.6% the previous month and less than the 8.5% increase in consumer prices in March compared to the previous year. The negative news was a decline in the work force by 363,000, the first decline since September and there was no clear explanation as to why. Total employment is still off by 1.2 million jobs compared to pre-pandemic numbers.
• Productivity fell by 7.5%, the worst number in 75 years.

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MARKET RECAP

• A brutal month comes to an end as the S&P 500 drops by 8.8% and the Nasdaq Composite lost 13.3%. For the week the overall US market fell by 3.43%. International stocks were down by 2.02%. Bonds stabilized somewhat, falling by 0.07%.

• The futures market anticipates a fed funds rate of 2.75% to 3% by year-end, up from 0.25% to 0.50% right now and higher than the 1.9% median projection in March. That has pushed the yield on the 10-year up by 139 basis points this year. As rates move higher p/e multipliers diminish, and that is what has happened.
• The advance estimate of Q1 GDP actually fell by 1.4% annualized after a 6.9% advance in Q4.
• The Fed will likely give guidance on how they will reduce their balance sheet this week. J.P. Morgan anticipates over the next four years, the impact of selling off the balance sheet would be equivalent to 2.1% in rate hikes.
• With about 70% of S&P 500 companies reporting so far, Q1 profits are on pace to grow by more than 10%. But the market has not been happy with big tech, which carries most of the market weight, AAPL was down 3.7% on a disappointing outlook and GOOGL down by 4.6% last week. The big hit was Amazon, dropping by 14%.

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MARKET RECAP

• US stocks fell by 2.76% for the week. Stocks were actually up after the Wednesday close by about 1.5%, but that is when Fed Chair Powell pretty much  much promised a half-point increase at the next meeting on May 3-4. And then St. Louis Fed President James Bullard started talk of a 3/4 point rate increase, although said he prefers a series of half-point increases. Maybe the back to back comments were enough to jar investors into believing what the Fed has more or less been saying for weeks, that much higher rates are on the way. The market would then fall by almost 4% on Thursday and Friday.
• The Fed-funds futures market is looking for 1/2 point next month, and 3/4 of a point for the June meeting, and then 1/2 point in late July. That increased the 2-year note by 27 basis points to 2.71%.
• PMI reports are indicating a slight slow down in economies around the world The composite PMI for the US came in at 55.1, down from 57.7 in March. It was the lowest reading in three months. Services took the brunt of the hit, down to 54.7 from 58 while manufacturing  was strong, rising to 59.7 from 58.8, the highest reading in seven month.
• Overseas, Europe’s biggest economy, Germany, reported a drop in the composite PMI to 54.5 in April from 55.1 in March.
• The job market is still strong, weekly jobless claims was less than 200,000 for the ninth consecutive week. The job market hasn’t been this strong since 1969. Housing starts are also strong, permits for new homes is 6.7% higher from one-year ago.

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