In a volatile trading week, stocks extended their losses as economic growth and inflation concerns soured investor sentiment.
The Standard & Poor’s 500 lost 2.41%, while the Dow Jones Industrial Average dropped 2.14%. The Nasdaq Composite index fell 2.80% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, slumped 3.21%.1,2,3
A Turbulent Week
Inflation moved to center stage last week with the release of April’s Consumer Price Index (CPI) and the Producer Price Index. Both numbers came near their 40-year highs but were lower than March’s year-over-year numbers. The results heightened investor anxiety about future Fed monetary tightening and its impact on economic growth.
In recent weeks, technology stocks have borne the brunt of the downdraft as investors lightened up on risk exposures, with some of the mega-cap tech names getting swept up in the selling pressure. Cooling import price increases buoyed spirits on Friday, helping spark a rally that reduced the week’s losses.
Inflation Stays Hot
Investors were greeted with a mixed CPI report, looking for signs that inflation may be cooling. Year-over-year costs rose 8.3%, slower than the previous month but faster than consensus estimates. Excluding food and energy, core inflation climbed 6.2%. Buried beneath the headline number was a 5.1% yearly increase in shelter costs, the most significant increase since 1991. Shelter costs account for one-third of the CPI.4
Inflation has been a weight on markets all year. Investors are concerned that the persistence of higher prices may tip the economy into recession as increased spending on essential needs crimps consumers’ spending power.
What Are We Waiting For?
One might ask, "What are we waiting for - let's move our portfolio to cash!"
The main reason is that I don't know the future, and any money you need to spend over the next 3 years should not be in stocks anyway.
But if we see the S&P make a 20% decline I will start to seriously think about recommending portfolio rebalancing or even increasing stock exposure. If we have a 30% decline I may start to get greedy. Because the key to outperformance is to be greedy when everyone else is scared. (Being scared when everyone else is greedy is less important because the upward bias of stocks makes it more likely you will be wrong if you try to call market highs.)
The other sign I am waiting for is indications that the Fed has figured out exactly what their highest interest rate will be. As long as we have major uncertainty about how high they might go there will be high volatility and little chance for stock price recovery.
Of course, outside events could trigger a change in direction: a change in China's zero-Covid policy might ease supply chain shortages, an unexpected end to the war in Ukraine or unexpected production increases elsewhere could ease oil prices. Unfortunately, all of those possibilities seem rather unlikely.
This Week: Key Economic Data
Tuesday: Retail Sales. Industrial Production.
Wednesday: Housing Starts.
Thursday: Existing Home Sales. Jobless Claims. Index of Leading Economic Indicators.
Source: Econoday, May 13, 2022
This Week: Companies Reporting Earnings
Tuesday: Walmart, Inc. (WMT), The Home Depot, Inc. (HD).
Wednesday: Cisco Systems, Inc. (CSCO), Target Corporation (TGT), Lowe’s Companies, Inc. (LOW), The TJX Companies, Inc. (TJX), Analog Devices, Inc. (ADI).
Thursday: Applied Materials, Inc. (AMAT), Palo Alto Networks, Inc. (PANW), Ross Stores, Inc. (ROST).
Friday: Deere & Company (DE).
Source: Zacks, May 13, 2022
"Though we see the same world, we see it through different eyes."
– Virginia Woolf
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Tip adapted from IRS.gov5
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Tip adapted from Mindful6
Name two words in the English language that have the letter "I" twice in the middle of the word.
Last week’s riddle: A librarian finds that pages have been ripped out of a novel. Pages 28, 29, 148, 211 and 212 are torn out. Given this, how many separate sheets of paper have been torn from the book? Answer: 4 sheets of paper. Pages 211 and 212 will be on opposite sides of the same sheet of paper.
Japanese white-eye amongst pink Plumerias.
Footnotes and Sources
2. The Wall Street Journal, May 13, 2022
3. The Wall Street Journal, May 13, 2022
4. CNBC, May 11, 2022
5. IRS.gov, February 16, 2021
6. mindful.org, February 22, 2022
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Weekly Market Insights: Inflation Takes Center Stage
May 16, 2022