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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