Commentary provided by Mark Szycher, Vice President, Investment Specialist, AIG Retirement Services
Market Performance Snapshot* (Week ending June 10, 2022 and year-to-date)
- Dow Jones Industrial Average®: -4.6% | -13.6%
- S&P 500® Index: -5.1% | -18.2%
- NASDAQ Composite® Index: -5.6% | -27.5%
- Russell 2000® Index: -4.4% | -19.8%
- 10-year U.S. Treasury note yield: 3.16%
- Up 22 basis points from 2.94% on June 3, 2022
- Up 165 basis points from 1.51% on December 31, 2021
- Best-performing S&P 500 sector this week: Energy, -0.9%
- Weakest-performing S&P 500 sector this week: Financials, -6.8%
*Past performance is no guarantee of future results.
Inflation data sends stocks down, Treasury yields up
Equities dropped sharply in a volatile week as key inflation data came in higher than expected, stoking fears the Fed will maintain its aggressive rate-raising into the fall. All S&P sectors finished the week in the red. Treasury yields climbed, with the 10-year surpassing its recent May high to close at 3.16% and the 2-year rising more than 0.25% on Friday alone to reach 3.07%, its highest level since 2008. (Bond yields move inversely to prices.)
- On Friday, the Bureau of Labor Statistics reported the Consumer Price Index (CPI) rose 8.6% annually in May, above April’s 8.3%, which was also the expected figure for May. It was the largest 12-month increase since December 1981.
- On a monthly basis, inflation rose 1.0%, well above the 0.7% expected and April’s 0.3%. Much of the gain was driven by energy and food costs. Gasoline prices rose 4.1% in May, while food prices rose 1.2%. Energy prices rose 34.6% over the past 12 months (with gasoline rising 48.7%) while food prices rose 10.1%, the first time food prices have risen at least 10% in a year since March 1981.
- Core CPI, stripping out food and energy prices, rose 0.6% in May and 6% over the past year, both slightly higher than expected. Housing costs rose 0.6% in May, the largest monthly increase since March 2004, and 5.5% over the past year, the largest 12-month gain since February 1991. Used car and truck prices again turned higher, rising 1.8% in May after falling for three straight months. Airfares were also up sharply, rising 12.6% in May after gaining 18.6% in April.
- U.S. benchmark West Texas Intermediate oil futures rose about 1.5% for the week as supply concerns persisted. Average U.S. gasoline prices reached a record high of nearly $4.99/gallon, up more than 20 cents in a week, according to the American Automobile Association (AAA).
- The University of Michigan consumer sentiment index for June registered 50.2, the lowest level on record. According to the report, “consumers’ assessments of their personal financial situation worsened about 20%. Forty-six percent of consumers attributed their negative views to inflation, up from 38% in May; this share has only been exceeded once since 1981, during the Great Recession.” The University of Michigan survey also showed an increase in 5-year inflation expectations from 3.0% to 3.3%.
- Weekly new unemployment claims rose to 229,000, the highest level since January 2022 and the fourth consecutive week above 200,000 after remaining below 200,000 for most of the previous three months. It’s not clear whether the slightly higher figures portend labor market cooling, though the four-week average of continuing claims remained at the lowest level since January 1970.
- Retail worries re-emerged as Target lowered its operating margin outlook for 2022 citing inventory challenges. The company said it has too many goods consumers have shifted away from as reduced pandemic-related worries have spurred more spending on services and as inflation has driven up costs and fueled more spending on necessities. Supply chain challenges have also caused seasonal items to arrive too late to be sold. Target expects lower profits as it discounts products to move them off shelves. Other retailers have flagged similar concerns in recent earnings reports. On Thursday, Target announced a 20% increase to its dividend.
- Food maker Campbell Soup Co. topped earnings expectations and raised its full-year outlook as quarterly net sales rose 9%, helped by higher prices. Sales volume declined 3% as consumers made fewer purchases and supply chain problems limited production. With regard to supply chain kinks Campbell’s CEO said, “I think there is light at the end of the tunnel,” but it could take until next year for issues to fully resolve. As a group, the S&P 500 food products category is up about 1% this year vs. the broader consumer staples sector’s 7.5% decline and the S&P 500 Index’s 18.2% decline.
Economists see slower growth ahead
The World Bank lowered its forecast for global growth in 2022 to 2.9% from the 4.1% forecast in January and the 5.7% achieved last year. The organization said conflict in Ukraine, continuing COVID uncertainty, and the possibility of stagflation—a combination of low real (that is, inflation-adjusted) growth and high inflation—make recession more likely for many countries.
- The Atlanta Fed’s GDPNow tracker, which incorporates real-time data into economic growth forecasts, now sees U.S. GDP growing 0.9% in the second quarter (ending June 30), down from its roughly 2.0% forecast in May. The figure is frequently revised.
- A report from mortgage analytics firm Black Knight found homeowners in April 2022 had $2.8 trillion more in “tappable equity”—defined as equity in a home that could be withdrawn while maintaining 20% equity—than in April 2021. The home equity spike could help sustain consumer spending, which accounts for about 70% of U.S. GDP. However, signs continue to point to a slowing housing market this year. Mortgage demand fell to a 22-year low in the first week of June, with home-purchase applications 21% below the same week last year. If slowing demand leads to declining home values, a key source of wealth for many Americans could diminish.
- The European Central Bank (ECB) lowered its forecast for 2022 Eurozone growth to 2.8% from its March forecast of 3.7%. Inflation is now expected to clock in at 6.8% vs. the 5.1% projected in March. In response, the ECB confirmed plans to end net bond purchases as of July 1 and to raise interest rates by 25 basis points at its July meeting, followed by another increase in September.
- The Reserve Bank of Australia (RBA) raised its benchmark rate by 50 basis points (to 0.85%)—its largest rate hike in more than 20 years and more than markets had expected. It was the second consecutive increase and the RBA signaled more increases to come.
- The Federal Open Market Committee (FOMC) meets June 14-15, with analysts anticipating another 50 basis point increase in the federal funds rate. The market has also priced in 50 basis point rate hikes in both July and September (the FOMC is not scheduled to meet in August).
- China’s exports grew 16.9% year-over-year in May, more than double the expected 8% and quadruple April’s 3.9% annual growth rate. Factories may have cleared order backlogs as parts of the country emerged from COVID lockdowns. Meanwhile, more than half of Shanghai’s residents were ordered to undergo COVID testing the weekend of June 11-12, raising concerns of further restrictions just weeks after the city’s strict lockdowns were lifted.
Final thoughts for investors
Inflation—and the Fed’s response to it—is still top of mind for markets. Lowered growth forecasts are also raising the specter of recession for at least some of the world’s economies. As markets await further data to clarify the picture, stay focused on long-term goals and speak with a financial professional.
VC 30955 (06/2022) J894414 EE