Market Update August 15, 2022

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Economic data for the week included consumer price inflation coming in little changed on the headline side, while producer price inflation declined on a headline level. Consumer sentiment improved more than expected.

Global equity markets rose sharply last week, as slowed inflation results led to positive sentiment. Bonds fared positively, with little change in rates, but tighter credit spreads. Commodities gained across the board, helped by a weaker dollar.

After a lackluster start to the week, U.S. stocks were up sharply on Wed. onward after the monthly CPI report showed a flattening in headline prices, and core CPI not getting significantly worse. The search by markets for an inflation peak translates directly to the path the Fed may take in upcoming meetings, such as whether the Sept. FOMC rate hike will be 0.75%, 0.50% (consensus base case), or 0.25%. From a technical standpoint, markets have upwardly retraced almost 50% of the early 2022 decline, which has generated more bullish sentiment. For the chartists out there, a key question has been whether an upward ‘breakout’ continues to take hold from this point. Every sector gained ground last week, led by energy, materials, and financials, all gaining over 5%. Defensive sectors consumer staples and health care lagged with gains under 2%. Real estate rose over 4% on the week as well.

The Inflation Reduction Act, a slimmed-down version of the earlier Build Back Better, has made its way through Congress, with little market reaction. This is despite the 15% minimum tax on company profits (although some important exemptions persist, resulting in lowered revenue estimates), a 1% excise tax on stock buybacks, and an increase in IRS tax enforcement efforts. These were far less severe than earlier proposals, so perhaps the magnitude was a bit of a relief. Of course, questions from tax and revenue experts surface which question the viability of those particular focal points. For instance, buybacks have been seen for years as a ‘negative’, since they represent cash that could be used for dividends or capex spending. However, on net they’ve added value to shareholders (through raising of EPS) as opposed to other potentially more wasteful uses of corporate cash (bad acquisitions).

Foreign stocks fared similar to U.S. equities in both developed and emerging markets, with relief over U.S. inflation results. European nations noted that tax and emergency relief would be made available in efforts to combat inflation and gas price pressures, while industrial production continued to grow. EM results were led by commodity-oriented Brazil, Mexico, and South Africa, while Chinese stocks were little changed.

U.S. bonds were mixed to higher, with minimal change in treasury yields but tighter credit spreads, which led to gains in corporates. Foreign bonds fared positively, due to a weekly decline in the dollar.

Commodities gained ground across the board last week, with energy and agriculture leading. The price of crude oil rose by over 3% to $92/barrel, while natural gas futures prices rose by another 9% (up over 130% year-to-date). Gasoline prices rose as well, although they’re down -10% over the last month, correcting further than other petroleum products. This appeared to improve the mood, via consumer sentiment and in other asset classes.

Period ending 8/12/20221 Week (%)YTD (%)DJIA2.99-5.98S&P 5003.31-9.34NASDAQ3.10-16.21Russell 20004.97-9.48MSCI-EAFE2.16-14.29MSCI-EM1.65-15.67Bloomberg U.S. Aggregate0.24-8.89

U.S. Treasury Yields3 Mo.2 Yr.5 Yr.10 Yr.30 Yr.12/31/20210.060.731.261.521.908/5/20222.583.242.972.833.068/12/20222.633.252.972.843.12

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.