Market Update May 9, 2022

Photo by Pawel Czerwinski on Unsplash

Economic data for the week included the Federal Reserve raising short-term interest rates by a half-percent, an amount not seen in over two decades. The employment situation report for April continued to show a strong improvement in jobs, while the unemployment rate remained unchanged at a tight level. ISM manufacturing and services fell back a bit, but remained solidly in expansionary territory.

Global equity markets experienced another volatile week, with U.S. stocks outperforming foreign markets. Bonds also declined along with rising interest rates, prompted by the Fed policy move. Commodities ended higher, driven by tight crude oil supplies.

U.S. stocks experienced more volatility last week, largely surrounding the Federal Reserve meeting and future tightening expectations noted earlier. Markets reacted tentatively early in the week, prior to the meeting, but rallied on Wed. after the 0.50% hike—especially after mention in the press conference of confidence in achieving inflation goals and also that a 0.75% hike is not actively being considered. This reassured markets to a large degree, perhaps due to the fact that such a dramatic hike is not seen as needed. However, Thursday’s equivalent decline offset that positivity, before things settled down a bit by Friday. The S&P remains near its -15% correction level, while the Nasdaq and small caps remain down more than -20% from highs. Within each index, stock dispersion remains greater, with half of the stocks in the Nasdaq now down over -50% from 52-weeks highs, as reported by Bloomberg.

Interestingly by sector, the majority of returns were little changed on the week, in keeping with the index. Energy was the largest contributor to returns on the week, up 10% due to gains in oil prices upon supply concerns, while utilities also provided positive returns. Consumer discretionary stocks lost several percent due to weakness from Nike and Amazon. Real estate also fell sharply along with rising interest rates.

Foreign stocks fell back by several percent, with emerging markets faring the worst of the group. European markets were largely driven by negative sentiment surrounding the U.S. Fed, and potential for more hawkish policy in their own region, despite economic struggles related to Ukraine and Russia. The Bank of England hiked rates by 0.25% to 1.00%, with policy trajectory falling somewhere between the hawkish U.S. and far less hawkish Europe. Chinese stocks fell back by over -5%, with concerns over Covid levels now in Beijing continuing. Concerns also remain about policy easing, specifically ensuring it remains targeted toward consumption and core business activities, as opposed to instead fueling housing speculation (which has contributed to current credit problems in the real estate sector).

U.S. bonds declined across the board, as the Fed rate hike pushed interest rates higher generally—the 10-year treasury tipped over 3% for the first time in four years. High yield and senior loans fared slightly better, although were also negative along with mixed equity results. With a stronger dollar, foreign bonds also lost ground.

Commodities rose by several percent last week, again negatively correlated to equity and bond prices. However, this was entirely due to energy, as industrial metals, precious metals, and agriculture lost some ground. The price of crude oil rose by 5% to just under $110/barrel, as markets weighed the impact on a further government bans on Russian oil outright—which would tighten global supplies further as OPEC+ nations have not been willing to open the spigots further. Natural gas prices also gained by over 10% again. The European Commission this week rolled out even more sanctions on Russian energy last week, including phasing out all crude oil imports over the next six months (25% of their oil used) and refined petroleum by year-end. (However, natural gas will continue to be imported for the time being.) Considering Europe’s reliance on Russian petroleum, this was seen as ambitious.

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.