Keeping focused on your long-term goals

Weekly Market Commentary | Week ending May 13, 2022

 

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

Market Performance Snapshot* (Week ending May 13, 2022 and year-to-date)

  • Dow Jones Industrial Average®:   -2.1% | -11.4%
  • S&P 500® Index:   -2.4% | -15.6%    
  • NASDAQ Composite®  Index:   -2.8% | -24.5%
  • Russell 2000® Index:   -2.6% | -20.2%
  • 10-year U.S. Treasury note yield: 2.92%
    • Down 22 basis points from 3.14% on May 6, 2022
    • Up 141 basis points from 1.51% on December 31, 2021
  • Best-performing S&P 500 sector this week: Consumer Staples, +0.3% 
  • Weakest-performing S&P 500 sector this week: Real Estate, -3.9%
     

 *Past performance is no guarantee of future results.

Inflation reports weigh on equities

Equities endured another tough week as the latest inflation readings reinforced concerns about how aggressively the Fed will tighten monetary policy. A rally on Friday couldn’t prevent the major indices from finishing firmly in negative territory. The consumer staples sector, viewed by many investors as more inflation-resistant, was the only S&P sector in the green.

  • By Thursday, the 10-year Treasury yield had fallen more than 30 basis points (0.3%) amid lowered expectations for economic growth and a growing appetite for the perceived safety and quality of government bonds. The yield climbed again Friday to end the week 22 basis points lower.
  • The U.S. Dollar Index reached its highest level in nearly 20 years as global investors sought safety and liquidity and anticipated further Fed rate hikes.
  • April’s Consumer Price Index (CPI) rose 8.3% annually, below March’s 8.5% gain but ahead of expectations of 8.1%. The monthly rise was 0.3%, well below March’s 1.2% but higher than expected.
  • Housing (+0.5%), food (+0.9%), airline fares (+18.6%), and new vehicles (+1.1%) were the largest contributors to the price rise in April. Food prices rose 9.4% over the last 12 months, the largest increase for any 12-month period since April 1981. Energy prices moderated during the month, with gasoline down 6.1%, but were still up 30.3% for the year. Used auto prices fell 0.4%, the third straight monthly decrease after blistering gains last year. 
  • Core CPI, stripping out volatile food and energy prices, was also higher than expected, rising 6.2% for the year and 0.6% for the month—lower on an annual basis than March’s 6.5% rise but higher on a monthly basis than March’s 0.3% gain.
  • The overall picture from the CPI report was of widespread inflation that may have peaked but could remain stubbornly high for longer than many hoped. Markets interpreted the report as evidence the Fed will remain on track for aggressive rate hikes through the summer.
  • The U.S. Producer Price Index (PPI), measuring prices along the supply chain, moderated slightly in April but remained near historic highs, rising 11% over the past year. That figure was below March’s 11.5% annual gain, and April’s monthly gain of 0.5% was below March’s 1.6% rise and the lowest since September 2021. Prices increased for goods, but were flat for services, though prices for transportation and warehousing services rose 3.6%.
  • Core PPI, stripping out food, energy, and trade services, was 0.6% higher in April, lower than March’s 0.9% gain. On a 12-month basis, April’s core PPI rose 6.9% vs. March’s 7.1%.
  • Weekly new unemployment claims remained just above the 200,000 level, while the 4-week moving average of continuing claims fell below 1.4 million, the lowest figure since 1970, providing further evidence of labor market tightness.
  • According to the National Federation of Independent Business’s April survey of small business owners, 47% said they could not fill current job openings (unchanged from March), with the construction, manufacturing, and retail sectors reporting the greatest difficulty. More than half of owners reported few or no qualified applicants.
  • Additionally, 32% of small business owners reported that inflation is the single biggest problem in operating their businesses and owners “are very pessimistic about sales and business conditions in the second half of the year.”
  • Tyson Foods reported higher sales as prices for beef, chicken, and pork all rose by double digits. Expenses also climbed, but the food processor beat earnings and income estimates. Tyson’s CEO said, “Every part of our business has been impacted by inflation. We experienced higher costs across our supply chain.”
  • On Thursday, the U.S. Senate confirmed Jerome Powell to another 4-year term as chairman of the Federal Reserve. In unrelated remarks to National Public Radio’s Marketplace, Powell reiterated the importance of the Fed’s inflation fight while acknowledging that “just getting back to 2% inflation while keeping the labor market strong” will be “quite challenging to accomplish” and “will also include some pain.” He continued his recent focus on the tight labor market, saying the Fed needs to “control the controllable” and “moderate demand in a way that lets the labor market get back in balance and help inflation get back to 2%.”

Data from China reflect impact of lockdowns

China’s export engine slowed in April as COVID lockdowns took their toll. Exports fell 0.9% from the previous month and were up just 3.9% from the previous year. By comparison, in March 2022, exports were 14.7% higher than the year before. Reduced exports from China can put upward pressure on global inflation.

  • China’s passenger car production declined 41% in April from the prior year as auto companies dealt with shortages of workers and parts as well as logistical challenges. Shortages and delays are rippling beyond the domestic auto market in China; for example, Tesla vehicle exports from China fell to zero for the month.
  • China’s PPI rose 8% in April from the previous year, less than March’s 8.3% rise but above the 7.8% expected. Given China’s role in global trade, Chinese producer prices are viewed as an indicator of global inflation trends.

U.S. consumers add debt, but delinquencies remain low

A quarterly report from the New York Fed found household debt rose 1.7% in the first quarter of 2022 to $15.84 trillion and is now $1.7 trillion higher than just before the pandemic. Credit card debt decreased, consistent with seasonal trends, while mortgage and auto loan balances increased. However, mortgage and auto loan originations declined in the quarter. 

  • The rate of delinquencies across debt types remained at or near historic lows and the New York Fed noted that just 2% of new mortgages were issued to subprime borrowers vs. an average of 12% in the years leading up to the 2008 housing finance crisis.
  • According to the New York Fed’s Summary of Consumer Expectations, U.S. consumers in April expected 6.3% inflation over the next year, down from the record 6.6% registered in March. However expectations of inflation over the next three years rose to 3.9% from 3.7%. The Fed watches inflation expectations because some economists believe consumers’ perceptions of inflation can influence buying behavior, thus translating into realized inflation readings.
  • The average price of a gallon of regular gasoline reached a record $4.43 on Friday, according to the American Automobile Association (AAA). California’s $5.87 was the highest average price and Georgia’s $3.95 was the lowest. The national average the same day of May 2021 was $3.03.

Final thoughts for investors

Inflation remains near historic highs and markets have been turbulent as investors assess the potential impact of additional Fed rate increases. Uncertainty and volatility are likely to remain elevated. Speak with a financial professional about navigating the road ahead while staying focused on long-term goals.

 

VC 30955 (05/2022) J875708 EE

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