Financial Market Update
Welcome to the StrategicPoint Financial Market Update — a market and economic overview of what occurred last week and what’s up for this week. Please find our market commentary and most recent Blog posts in our StrategicPoint of View®.
The markets seemed to react with fear last week. The major indexes fell, with about 90% of S&P 500 stocks losing ground and every major market sector closing in the red. Investors turned to bonds, sending the price of 10-year Treasury notes up and the yield down. Wall Street is also preparing for what is expected to be the first 50-basis point increase in the federal funds rate since 2000, following the meeting of the Federal Open Market Committee this Tuesday and Wednesday. The Nasdaq (-3.9%) and the Russell 2000 (-4.1%) led the drop in the indexes, followed by the S&P 500 (-3.3%), the Global Dow (-3.0%), and the Dow (-2.5%). Crude oil prices added more than $3.00 to climb past $104.00 per barrel. The dollar advanced, while gold prices slid.
Last Monday, tech stocks posted solid gains, helping to drive the major benchmark indexes higher. Conversely, stocks that move with the economy slid lower as a rise in COVID-19 cases in China raised concerns about a global economic slowdown. Energy, materials, real estate, and utilities were sectors that performed poorly, while communication services, consumer discretionary, and information technology moved higher. Among the market indexes, the Nasdaq (1.3%) led the advance, followed by the Dow (0.7%), the Russell 2000 (0.7%), and the S&P 500 (0.6%). The Global Dow fell 1.3%. Ten-year Treasury yields dipped 8 basis points to close at 2.82%. The dollar continued to rise, increasing $0.52 to $101.74. Crude oil prices dropped $3.34 to $98.73 per barrel.
Stocks fell last Tuesday, unable to maintain the previous day’s momentum. Disappointing first-quarter earnings data from some major companies, coupled with more shutdowns in China in response to the increasing spread of the coronavirus, helped drive stocks to a six-week low. The Nasdaq (-4.0%) and the Russell 2000 (-3.3%) dropped the furthest, followed by the S&P 500 (-2.8%), the Dow (-2.4%), and the Global Dow (-1.6%). Bond prices continued to climb, pulling yields lower, with 10-year Treasury yields slipping 5.4 basis points to 2.77%. The dollar, crude oil, and gold prices advanced.
Equities closed last Wednesday with mixed results following a choppy day of trading. The Dow and the S&P 500 edged up 0.2%, while the Russell 2000 and the Global Dow fell 0.3%. The Nasdaq ended the day flat. Ten-year Treasury yields ended a streak of declines after rising 4.6 basis points to close at 2.81%. Crude oil prices climbed to $102.24 per barrel as the European Union’s ban on Russian crude gained support from Germany. The dollar rose higher for the sixth straight session.
Wall Street continued to be marked by volatility as stocks shot higher last Thursday. Favorable first-quarter earnings reports from several large companies provided the impetus behind the market’s best rally in seven weeks. The Nasdaq jumped 3.1% and the S&P 500 added 2.5% to lead the benchmark indexes listed here. The Dow (1.9%), the Russell 2000 (1.8%), and the Global Dow (1.3%) also edged higher. Bond prices slid, pushing yields higher, with 10-year Treasuries gaining 4.5 basis points to 2.86%. Crude oil prices also advanced, gaining $3.31 to reach $105.33 per barrel. The dollar rose again, as did gold prices.
Stocks closed last Friday in the red, with each of the benchmark indexes listed here losing value. Disappointing first-quarter earnings reports from some major tech companies drove tech shares lower, causing the S&P 500 (-3.6%) and the Nasdaq (-4.2%) to tumble. The Dow lost nearly 900 points, ultimately giving back 2.8% by the close of trading last Friday. The Russell 2000 fell about 3.0% and the Global Dow slipped 1.0%. Ten-year Treasury yields rose 2.4 basis points to 2.88%. Crude oil prices declined $1.30 to $104.07 per barrel. The dollar dipped for the first time in several sessions.
S&P 500: 4,131 (down 3.27% for the week and down 13.31% for the year)
NASDAQ: 12,334 (down 3.93% for the week and down 21.16% for the year)
Dow: 32,977 (down 2.47% for the week and down 9.25% for the year)
US Treasury 10yr: 2.88% (from 2.90% last week)
Crude Oil: $104.07 (from $101.22 last week)
Gold: $1,897.90 (from $1,934.40 last week)
USD/Euro: $1.0550 (from $1.0801 last week)
Market Commentary – StrategicPoint of View®
What’s Up With Current Market Volatility?
We are amid one of those nasty pullbacks, and this time there is no place for an investor to hide. April ended with the S&P 500 and the All World Country Index Ex US down 13% year to date, while the US aggregate bond index has fallen 9%. Commodities have been a bright spot, but a diversified portfolio can only hold so many shares of this volatile asset class. Market performance has left many investors praying for a turnaround soon before more damage can be done.
Let’s remember that markets correct for a variety of reasons, with recovery rates varying tremendously based on the cause of any downturn. For example, it took 15 years for the Nasdaq to recoup losses after the tech bubble burst in 2000 and only five months for the S&P 500 to rebound after the 2020 pandemic pullback, thanks to quick action on the part of the Federal Reserve. The comeback for the S&P 500 after the 2008 credit crisis was seven years. And while recovery times following recessions vary depending on the severity of the recession, the average has been calculated at around 2 years. When we are not experiencing a market bubble, a credit crisis, a recession or a black swan event, markets can rise and fall within a matter of days or weeks, depending on the headline news. This is why it is so hard to “time” the markets.
So, why are markets struggling now?
The key factor is inflation – or more specifically the cure for inflation. (There are other concerns holding back the markets, but I will focus on the Federal Reserve’s response to inflation.) The Federal Reserve oversees control of inflation. The key tools the Fed uses are raising interest rates to curtail demand and paring back government debt which reduces available money to spend and invest.
Markets fear that the Fed will need to act too aggressively to combat inflation, raising interest rates significantly and driving the economy into a recession. The Fed’s inflation fighting actions are called tightening. The good news is that when a recession does happen following Fed tightening, it usually doesn’t occur for several years. That is because when tightening starts, the economy is usually quite strong and Federal Reserve actions take a while to work their way through the economy.
You might have noticed this past week that first quarter Gross Domestic Product (GDP) figures were released. As the number was negative, rumors of a “recession” immediately popped up. There is a general impression that the definition of a recession is two back-to-back negative quarters of GDP growth. While two quarters of contraction are usually necessary, the definition is much broader than GDP. The National Bureau of Economic Research is charged with reviewing a large range of data, including employment, income, manufacturing and wholesale/retail sales, to determine when a recession begins and when it ends. Since the labor market is the strongest in around 40 years, incomes are rising at a steady clip, manufacturing numbers are up, and sales are as high as supply chains allow, it is highly unlikely that we are entering a recession at this moment. Q1 GDP actually fell due to an issue with trade, whereby imports exceeded exports due to supply chain logistics. That issue will hopefully prove temporary.
Alan Blinder, former Vice Chair of the Federal Reserve, wrote an op-ed in the Wall Street Journal last week in which he argued that the next recession is likely to be a mild one, given that this round of inflation is young, the Federal Reserve has the tools and the desire navigate a soft landing, and the $2.5 trillion in US consumer savings will help cushion the blow of higher interest rates.
So, if a recession is not likely for several years and, if it does occur, it could turn out to be mild, why are the markets so pessimistic?
In part it is that the markets entered the year overvalued by most estimations. The three-year annualized S&P 500 return from 2019- 2021 was 24%, much higher than the long-term average 10.5% annual rate of return since 1920. Since markets tend to revert to their averages over time, markets were primed to pullback in 2022 if given the opportunity.
In addition, the current decline of the stock market is hardly unusual. Since 1945 the average drawdown in a midterm election year has been 17-19%. With the S&P down 13% YTD, this pullback is well within the norms. Historically, markets find a bottom during midterm election years sometime before the fall, at which point trends show a recovery into the end of the year. It could be that markets are simply following an historical pattern.
However, the most likely reason is that the Federal Reserve must navigate a very narrow path to reduce inflation successfully without dramatically impacting the economy. A successful soft landing is anything but assured. If the Federal Reserve moves too aggressively, economic growth could falter, and the economy could be thrown into a recession that is none too mild. However, if the Fed moves too slowly, inflation could continue to climb, requiring even more aggressive Fed action in the future, and thus continued misery at the pump and grocery store. In the Goldilocks scenario, the Fed reduces economic growth just enough to quell high inflation without causing jobs, income, production and spending to meaningfully contract. The uncertainty of possible outcomes is what keeps the markets guessing and gyrating.
Until the current unknowns are known, markets will likely continue to vacillate between positive and negative returns. By the time investors feel confident in where the economy could land, they will likely already be looking towards the next recovery and uptrend. That is how business cycles and corresponding market movements often unfold.
Betsey A. Purinton, CFP®
Managing Partner and Co-CIO
The Federal Open Market Committee meets this week, the results of which are almost certainly to include at least a 50-basis point interest-rate hike. The April employment figures are also available this week. There were 431,000 new jobs added in March. Average hourly earnings have risen 5.6% since March 2021.
What’s Up With Current Market Volatility?
Read our blog on current market volatility by Co-Chief Investment Officer, Betsey A. Purinton, CFP®.
StrategicPoint Promotes Derek Amey to Co-CIO
In a move expected to provide long-term leadership continuity, StrategicPoint Investment Advisors announced today the promotion of Derek M. Amey to Co-Chief Investment Officer (CIO).
The Novice and The Nerd Podcast, Episode 39:The Fear Index, The Fed and Gas Prices
In this episode the Novice and the Nerd discuss the VIX index, the Fed raising rates and if high gas prices are here to stay
The Novice and The Nerd, Episode 38: Women and Financial Planning
In this episode, Laura and (guest “nerd”) Kristina Mello use the timing of Women’s History Month to focus on the unique financial challenges women can face, along with highlighting the importance of financial planning.
*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.
Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Third party content does not reflect the view of the firm or of our parent company, Focus Financial Partners. LLC and is not reviewed for completeness or accuracy. It is provided for ease of reference.
Parts of this report were prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2022. Part of this content contributed by Forefield, Inc.