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.

SCOREBOARD

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%.

SCOREBOARD

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