Commentary provided by Mark Szycher, Vice President, Investment Specialist, AIG Retirement Services
Market Performance Snapshot* (Week ending May 20, 2022 and year-to-date)
- Dow Jones Industrial Average®: -2.9% | -14.0%
- S&P 500® Index: -3.0% | -18.1%
- NASDAQ Composite® Index: -3.8% | -27.4%
- Russell 2000® Index: -1.1% | -21.0%
- 10-year U.S. Treasury note yield: 2.79%
- Down 13 basis points from 2.92% on May 13, 2022
- Up 128 basis points from 1.51% on December 31, 2021
- Best-performing S&P 500 sector this week: Energy, +1.1%
- Weakest-performing S&P 500 sector this week: Consumer Staples, -8.6%
*Past performance is no guarantee of future results.
Major retailers and recession fears drag equities down
Stocks took another beating as major retailers’ earnings reports raised concerns about companies’ rising costs and recession worries grew. The Dow Jones Industrial Average fell for the eighth straight week and the S&P 500 briefly sank into a bear market Friday (down 20% from the most recent high). The 10-year Treasury yield dipped as investors sought safety in bonds and now sits more than 30 basis points (0.3%) below its recent closing high on May 6. Treasury yields move inversely to prices.
- Target and Walmart both posted lackluster earnings for the most recent quarter. Though revenue for each company topped expectations, net income fell short as the companies grappled with rising product and labor costs and supply chain challenges led to uneven inventories. “The supply chain didn’t move towards normal as quickly as we thought,” said Walmart’s CFO.
- While Walmart indicated that some consumers are shifting to store brands in response to inflation, Target noted customers shifting spending to items associated with travel and experiences, such as luggage.
- Home Depot reported fewer customer transactions but a larger average amount per transaction as inflation pushed customer spending higher. Revenue and earnings topped expectations and the company raised its full-year earnings guidance as it expects higher house values to fuel spending on home improvement projects.
- Lowe’s reported higher-than-expected net income but revenue fell short as cooler weather in April chilled outdoor equipment and furniture purchases. The company’s CEO said spending on appliances and home renovation remains strong: “Home price appreciation simply gives the homeowner confidence that they can invest in their home and can get a return on their investment.”
- Overall U.S. retail spending grew 0.9% in April (close to the 1.0% expected) and 8.2% year over year. March’s increase was also revised sharply upward, from +0.7% to +1.4%. Price increases are driving much of the growth, as the figures are not adjusted for inflation.
- Excluding gasoline sales, which declined 2.7% in April, retail sales rose 1.3% for the month. Restaurant spending grew 2.0% while grocery store spending dipped 0.1%. Spending on furniture and electronics rose.
- In remarks at a Wall Street Journal conference, Federal Reserve Chair Jerome Powell said “restoring price stability is a nonnegotiable need. It is something we have to do,” while acknowledging, “It will be challenging to do that. We have to slow growth to do that.”
- Powell also said the Fed will continue raising interest rates until there is “clear and convincing evidence” that inflation is coming down, and “if that involves moving past levels of neutral, we will not hesitate to do that.”
- Powell suggested that parsing inflation data for positive signs isn’t productive in the current environment: “This is not a time for tremendously nuanced readings of inflation. We need to see inflation coming down in a convincing way … Until we see that, we are going to keep going.”
CEO confidence declines amid inflation and growth challenges
The Conference Board’s Measure of CEO Confidence fell into negative territory in the second quarter. Sixty percent of CEOs surveyed think the economy will worsen over the next six months, up sharply from 23% the previous quarter. Fifty-seven percent expect inflation to moderate over the next few years, but at the cost of a mild recession. Another 20% think inflation will remain elevated and economic growth will slow significantly. Only 12% think inflation can come down without a recession.
- Nearly 70% of CEOs said they’re raising wages across the board in response to tight labor market conditions and 54% said they’re passing higher costs on to customers.
- The Federal Reserve reported that total industrial production increased 1.1% in April, the fourth consecutive month of gains of 0.8% or greater. The utilities index grew fastest at 2.4% while manufacturing output rose 0.8%.
- Initial unemployment claims rose to 218,000, the highest reading since January, but remained near recent lows. The previous week’s figure was revised downward. Meanwhile, the 4-week moving average of continuing claims remained at the lowest level since 1970.
- According to the National Association of Realtors (NAR), existing home sales in April fell 2.4% from March and 5.9% from April 2021, growing at the slowest annualized rate since June 2020. The average home price hit a new high of $391,200, 14.8% higher than April 2021. Higher mortgage rates are expected to weigh on home purchases, with NAR’s chief economist saying, “It looks like more declines are imminent in the upcoming months, and we'll likely return to pre-pandemic home sales activity after the remarkable surge over the past two years.”
- Several of China’s economic indicators turned negative in April. Industrial production fell 2.9% from a year earlier, manufacturing activity slipped 4.6%, and the unemployment rate reached a 2-year high of 6.1%, the second straight month above the government’s 5.5% target. COVID lockdowns have weighed on China’s growth and raised concerns about the spillover effects on global growth and inflation. Meanwhile, trouble in the property market prompted the People’s Bank of China to lower the prime rate on 5-year loans from 4.60% to 4.45%, moving in the opposite direction of many western central banks.
- On the bright side, Shanghai began a gradual reopening with the goal of fully lifting COVID restrictions by June 1, subject to containment of COVID and other public health data.
- Wheat prices rose early in the week after India announced a ban on further exports amid declining crop yields. India had been helping to fill the gap created by diminished exports from Ukraine. Though prices dipped later in the week, wheat futures are still up 52% year-to-date, adding to global inflationary pressures.
Final thoughts for investors
Market volatility continues as inflation and recession concerns weigh on investor and CEO confidence. It will likely take additional economic data to provide markets a clear sense of where inflation and growth are headed, but you don’t have to ride out the turbulence alone. Speak with a financial professional about achieving your long-term goals.
VC 30955 (05/2022) J880807 EE