Keeping focused on your long-term goals

Weekly Market Commentary | Week ending June 3, 2022

 

Commentary provided by Mark Szycher, Vice President, Investment Specialist, AIG Retirement Services

Market Performance Snapshot* (Week ending June 3, 2022 and year-to-date)

  • Dow Jones Industrial Average®:   -0.9% | -9.5%
  • S&P 500® Index:   -1.2% | -13.8%
  • NASDAQ Composite®  Index:   -1.0% | -23.2%
  • Russell 2000® Index:   -0.3% | -16.1%
  • 10- year U.S. Treasury note yield: 2.94%
    • Up 19 basis points from 2.75% on May 27, 2022
    • Up 143 basis points from 1.51% on December 31, 2021
  • Best-performing S&P 500 sector this week:   Energy, +1.2%
  • Weakest-performing S&P 500 sector this week: Health Care, -3.1%
  • Best-performing S&P 500 sectors in May 2022: Energy, +15.0%, Utilities, +3.8%,  Financials, +2.6%
  • Weakest-performing S&P 500 sectors in May 2022: Real Estate, -5.1%, Consumer Discretionary, -4.9%,  Consumer Staples, -4.7%

     *Past performance is no guarantee of future results.

Equities rally to close May mostly flat, but sputter to start June

A sharp rally during the week leading into Memorial Day helped the Dow Jones Industrial Average and S&P 500 squeak into positive territory for May (each up less than 0.1%). The NASDAQ Composite suffered a 2.1% monthly loss, while the Russell 2000 ended in the red by less than 1 index point (0.003%). Stocks gave back some gains coming out of the holiday, picked up steam mid-week, but fell on Friday after May’s jobs report renewed concerns about the Fed’s aggressive rate-hiking path. All major indices ended lower for the week. The 10-year Treasury yield rose nearly 0.2% after three straight weekly declines.

  • Energy led the way among S&P 500 sectors in May, gaining nearly 15% as oil and natural gas prices resumed their upward momentum. The price of U.S. benchmark West Texas Intermediate crude rose more than 9% for the month. U.S. natural gas prices rose nearly 11% in May and are up more than 130% year-to-date amid increased exports to Europe, among other factors.
  • The consumer staples and consumer discretionary sectors each lost nearly 5% in the month as inflation fears and some early retail earnings reports raised concerns about companies’ cost pressures and ongoing supply chain challenges, as well as consumers’ responses to inflation. However, other earnings and forecasts from the likes of dollar stores, TJX, Macy’s, and Nordstrom gave investors more confidence, helping to fuel the late-May rally.
  • The last two weeks of May saw Treasury yields decline (and prices rise) as investors grew more confident in the path of future Fed rate increases and pursued higher bond yields. After reaching a more than three-year high of 3.13% on May 6, the 10-year Treasury yield fell to 2.75% on May 27 before rising 10 basis points to 2.85% on the final trading day of May—still off about 8 basis points from the end of April.
  • May was the first month this year in which the 10-year yield fell, following major climbs of nearly 60 basis points in April and more than 50 basis points in March. The 2-year Treasury yield fell by an even steeper 16 basis points in May after climbing nearly 200 basis points in the first four months of 2022.

Economic data show continuing labor market strength, potential warning signs

On Friday, the Labor Department reported 390,000 jobs created in May, higher than the 328,000 expected but lower than April’s upwardly revised 436,000 gain. Leisure and hospitality, professional and business services, and transportation and warehousing led the job gains.

  • Markets were unenthused about the May jobs figure, fearing that a still-hot labor market will keep pressure on the Fed to continue raising interest rates. However, May’s job gain was the lowest since April 2021, suggesting some labor market cooling.
  • The labor force participation rate ticked up to 62.3%, still below the pre-pandemic level but a signal that some workers are starting to get drawn back into the workforce. Average hourly earnings rose 5.2% annually in May vs. April’s 5.5%, a potentially encouraging sign that some inflation pressures could be easing.
  • Payroll processor ADP’s monthly count of private-sector job gains registered just 128,000 new jobs in May, including a decline in jobs among small employers. It’s unclear how much the slowdown reflects a worsening economic outlook or an inability to find enough qualified workers in a tight labor market.
  • U.S. job openings declined by 455,000 at the end of April, but remained at a historically elevated 11.4 million, according to the Job Openings and Labor Turnover Survey. Job openings outpaced available workers by more than 5.4 million.
  • The job-quit rate, viewed as a barometer of workers’ confidence in their ability to find better jobs or higher pay, remained above 4.4 million, also near record-high territory. Layoffs fell 170,000 to a data-series low of 1.2 million.
  • The Conference Board’s Consumer Confidence Index fell slightly in May to 106.4 from an upwardly revised 108.6 in April. Noteworthy was a “perceived softening in labor market conditions.”
  • Inflation and rising interest rates may be starting to influence consumer behaviors and expectations. The Conference Board noted that “purchasing intentions for cars, homes, major appliances, and more all cooled—likely a reflection of rising interest rates and consumers pivoting from big-ticket items to spending on services. Vacation plans have also softened due to rising prices.” While the Federal Reserve is trying to dampen demand (and price increases) with higher interest rates, it’s hoping to do so without tipping the economy into recession.
  • The Commerce Department’s inflation gauge, the Personal Consumption Expenditures (PCE) index, rose 0.2% in April—well below March’s 0.9% gain. April’s 12-month increase of 6.3% was also lower than March’s 6.6%. Worth noting: Gasoline prices declined in April, helping to keep a lid on overall prices, however other data show energy prices rebounded in May.
  • Core PCE, the Fed’s preferred inflation gauge, which strips out volatile food and energy prices, rose 0.3% in April—the third consecutive month at that level. April’s core prices rose 4.9% on the year, the second straight month of decelerating gains.
  • The Commerce Department also reported consumer spending grew 0.9% in April, slower than March’s 1.4% gain but still robust. The spending gain outpaced gains in personal income, suggesting consumers are drawing down savings to support continued spending.
  • The Commerce Department’s second estimate of Q1 U.S. GDP growth dipped a bit to -1.5% from the earlier reported -1.4%.
  • The Federal Reserve’s latest Beige Book, an anecdotal look at business conditions across the Fed’s 12 districts, noted that business contacts in eight districts have lower expectations of future growth, while those in three districts “specifically expressed concerns about a recession.” With respect to rising prices, more than half of districts “cited some customer pushback, such as smaller volume purchases or substitution of less expensive brands.”
  • Pending home sales declined 3.9% in April, versus an expected 1.5% decline and a 1.6% decline in March. April featured the slowest pace of sales in nearly a decade and the sixth consecutive month of declines. Meanwhile, sales of new single-family homes registered an annual pace of 591,000 in April, well below the consensus expectation of 750,000 and March’s 709,000—the biggest monthly drop since 2013.
  • The Mortgage Bankers Association reported mortgage demand in the last full week of May fell to the lowest level since December 2018. After declining alongside Treasury yields in May, mortgage rates jumped as June started, reflecting rising Treasury yields.

Central banks take on inflation

Minutes from the Federal Open Market Committee’s May meeting showed growing consensus around the need for additional 50 basis point rate increases at the June and July meetings. Markets are trying to assess how high the federal funds rate will have to go to tame inflation, and whether the Fed can tamp down inflation without pushing the economy into a prolonged recession. 

  • Fed officials have spoken about the potential for raising rates past “neutral” to a level that begins restricting economic growth. According to the May meeting minutes, “participants judged that it was important to move expeditiously to a more neutral monetary policy stance. They also noted that a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook.”
  • Fed governor Christopher Waller told an international audience on Memorial Day, “By the end of this year, I support having the policy rate at a level above neutral so that it is reducing demand for products and labor, bringing it more in line with supply and thus helping rein in inflation.” San Francisco Fed president Mary Daly said that unless data show inflation being tamed, “we need to go into restrictive territory.” Fed Vice Chair Lael Brainard suggested additional 50 basis point increases in June and July are likely and said, “it’s very hard to see the case for a pause” in interest rate increases after the summer.
  • June marks the first month in which the Federal Reserve will allow Treasuries and mortgage-backed securities on its balance sheet to mature without reinvesting the proceeds. This “quantitative tightening” process will proceed at a pace of up to $47.5 billion per month in June, July, and August, rising to a maximum of $95 billion per month in September and thereafter. Markets and the Fed will be observing how investors and market segments respond to the resulting reduction in liquidity.
  • The Bank of Canada raised its benchmark interest rate to 1.5%, its second straight 50 basis point rate hike.
  • The head of the European Central Bank (ECB) said the ECB is nearing a rate increase, perhaps in July, and could raise rates into positive territory by the end of the third quarter. The ECB’s benchmark rate is -0.5% and has been negative for eight years as the Eurozone struggled with persistently low inflation until the post-pandemic period.
  • Eurozone inflation registered 8.1% in May, up from 7.4% the previous two months and the highest level since data began in 1997. Europe, which had relied on Russia for a larger proportion of energy than the U.S. does, has been vulnerable to rising oil and gas prices. Energy prices were up 39.2% in May over last year.
  • The European Union reached agreement on new Russia sanctions that will ban the import of Russian oil and refined products transported by ship, while Germany and Poland will also end imports of oil moved through pipelines, for a 90% reduction of Russian oil imports by the end of the year. The EU will also forbid European insurance companies from insuring Russian oil cargoes anywhere in the world—an effort to interdict Russian shipments to China and India, which have been heavy buyers of Russian oil since western sanctions were imposed.
  • Major oil producers known as OPEC+ agreed to larger-than-expected increases in output quotas for July and August, however the increase wouldn’t fully compensate for the loss of Russian oil in global markets and it’s not clear whether production from the other countries will actually reach the new limits. Crude futures rose more than 4% for the week.
  • The U.S. Treasury Department ended an exemption that had allowed Russia to make debt interest payments through U.S. banks, increasing the potential for a Russian default on foreign debt later this summer. Most foreign-held Russian debt has already been deeply discounted by investors.
  • Chinese authorities began lifting COVID lockdowns in Shanghai, though restrictions remain. Markets are hopeful a return to normal in Shanghai—a global manufacturing hub—can have beneficial effects on global growth.

Final thoughts for investors

While equities and bonds appeared to stabilize somewhat toward the end of May, market volatility remains high. The Fed’s commencement of quantitative tightening adds a new source of market uncertainty on top of existing questions about inflation, economic growth, global supply chains, the Ukraine conflict, and COVID disruptions in China. In a highly uncertain environment, stay focused on long-term goals and speak with a financial professional.

 

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