May Market Recap

June 1, 2022 

Zero-point-zero-one percent (0.01%).

That’s how much the S&P 500 gained last month. And to be honest, we’re rounding up. The official math was actually 0.005%. Is that something worth celebrating? Perhaps not. No one will be popping any champagne corks after reviewing their May 31 statements, but even the most modest of positive returns does represent a step in the right direction following April’s aggressive selloff.

Six of the 11 sectors in the S&P 500 moved higher in May, led by Energy (+15%) and Utilities (+3.8%). Five equity sectors booked losses. Of those, Real Estate (-5.1%), Consumer Discretionary (-4.9%), and Consumer Staples (-4.7%) performed the worst.

Index	May 2022	YTD 2022
Dow	+0.04%	-9.21%
S&P 500+	+0.01%	-13.30%
NASDAQ	-2.05%	-22.78%

High inflation and tighter monetary policy from the Federal Reserve remain the angry elephants in the proverbial room that investors are trying to navigate. As far as market obstacles, expect those two to remain at the top of the list for the foreseeable future.

Inflation actually slowed in May. The most recent Consumer Price Index revealed year-over-year inflation of 8.3%, lower than a month earlier (8.5%), but still higher than consensus estimates.

On May 4, the Fed raised its benchmark interest rate by 0.50% and announced plans to begin “passive tightening.” Beginning in June, the Fed will not reinvest the interest paid by its existing bonds and will not reinvest the principal from maturing bonds. A maximum of $95 billion per month will effectively roll off the Fed’s balance sheet.

More significantly, Fed Chair Jerome Powell said the Fed was “not actively considering” rate hikes as large as 0.75%. Equities initially took Powell’s comments as a positive. The Dow rallied 932 points (2.8%) on May 4. The S&P 500 and NASDAQ bounced even more. Those gains, however, did not last long. On the following day (May 5), the Dow fell 1,063 points (3.1%). The S&P lost 3.6%. The NASDAQ dropped 5%.

It’s the first time since March 2020 that US stocks delivered such whipsaw results on consecutive days. High volatility is certainly indicative of a bear market, and while the S&P has so far avoided a 20% peak-to-trough decline (if we’re sticking with end-of-day prices), it is basically semantics at this point.

Ignoring the Energy sector – up nearly 56% year-to-date thanks to skyrocketing oil prices – the S&P has already ventured well into bear market territory. The tech-heavy NASDAQ and smaller-cap Russell 2000 both lost more than 30% at their low points.

Everyone wants to know whether those mid-May lows represent “the bottom.” There’s no way to know for sure, but history is on our side in terms of forward-looking returns.

The first 100 trading days of 2022 (S&P -16.5%) make this one of the six worst starts to a calendar year since 1930. In the other five, US stocks were positive over the next seven months every time, with the S&P gaining 19% on average through year-end.

Equities did stage a significant rally in the final week of May. The S&P 500 increased 7% in those five trading days, its best week of the year. It also snapped a string of seven negative weeks in a row. Perhaps the tide is beginning to turn.

Bond prices also stabilized in the second half of May. 10-year US Treasury yields climbed as high as 3.17% on May 9 before reversing course and ending the month at 2.84% (slightly below the 2.89% yield from a month earlier). The major US bond benchmarks have lost roughly 10% year-to-date through May 31, though our individual bond ladders employed in Marks Group portfolios have held up much better.

The May 31 lifting of government-mandated lockdowns in China offered another glimmer of hope for investors.  The Chinese economy and global supply chains were severely disrupted following a spike in new COVID-19 cases and the resulting lockdowns.

International equities outperformed in May. Non-US Developed Markets (as represented by the MSCI EAFE Index) increased 2%. Emerging Markets gained 0.6%.

US mortgage rates hit their highest level since 2009. The rate on a 30-year fixed loan was 5.3% at month’s end, essentially double the rate from the low point in January 2021.

The US jobs report showed national unemployment remains exceptionally low at 3.6%.

Gasoline prices hit another record high with average costs of $4.69 per gallon, according to AAA. It’s now 50% more expensive to fill your car with gas than it was a year ago ($3.11 per gallon).

West Texas Intermediate Crude oil trades near $115 per barrel, up another 9.5% in May.

March Market Recap

April 1, 2022 

While the NCAA basketball tournament provided its annual dose of can’t-miss entertainment, stocks were able to survive and advance in what proved to be the best (and only positive) month this year for US equities.

Similar to a good March Madness game, it was hard to guess the finish based on the way things started. Momentum remained mostly negative in the first two weeks. When markets closed on March 14, the NASDAQ was 8.5% lower than it began the month. From there, it bounced 13% higher in 13 trading days.

When the dust settled, each of the three major equity benchmarks rose between 2-4% for the month. Ten of the 11 sectors in the S&P 500 were positive led by Utilities (+10.1%), Energy (+8.8%) and Real Estate (+7.3%). Financials (-0.4%) was the only sector to finish in the red.

Index	March 2022	YTD 2022
Dow	+2.53%	-4.57%
S&P 500+	+3.58%	-4.95%
NASDAQ	+3.41%	-9.10%

The trading week that ended on March 18 was the best week for US stocks since the November 2020 election. The NASDAQ gained 8.2% in that week alone. The S&P increased 5.6%, including four consecutive days with gains of 1% or more; only the fifth time ever that has happened.

Some of the recovery in equities can be attributed to the realization that the military conflict between Russia and Ukraine does not set the globe on an inevitable path to World War III, a popular (if far-fetched) concern a month ago as investors contemplated worst-case scenarios.

It’s probably also true that sentiment simply became too pessimistic. Consumer confidence readings in March were the lowest in 10 years. War, inflation, Fedwinds… Whatever your favorite brick in the latest wall of worry, fear and anxiety seemed to snowball until mid-March, which reminds us of Warren Buffett’s oft-cited investment advice to “be greedy when others are fearful.”

The rate of inflation continues to increase. The latest Consumer Price Index rose 7.9% from a year earlier and the spike in energy prices made worse by war-related supply chain disruptions seems likely to push inflation even higher this summer.

That provides the backdrop for Federal Reserve policy and Fed Chair Jerome Powell, who on March 16 announced a 0.25% rate hike and plans for seven hikes by year-end. It’s a delicate dance the Fed must choreograph to counteract inflation without triggering an economic recession, but it’s encouraging that the market responded favorably to Powell’s latest update. The S&P 500 increased 2.2% that day.

Bond yields jumped significantly in the last four weeks. The 10-year US Treasury yield finished March at 2.33%, compared to a 1.7% yield less than a month earlier. As yields increase, the price of existing bonds go down. It’s been a rocky start to the year for investors who own bond funds with the US Aggregate Bond Index down nearly 6% year-to-date.

Yield curve inversions tend to generate headlines because they are a well-known precursor to recessions. The 2-year vs 10-year Treasury curve inverted in March. Yes, it’s a potential warning, but not as simple as some folks would lead investors to believe. The last four times this occurred, equity prices did not peak until 17 months later.

If you’re a homeowner, feel free to celebrate the surge in home prices over the last 12 months. The Case-Shiller US Home Price Index shows an average annual increase of 19% in home prices. Residential real estate in Miami (+28%), Tampa (+31%) and Phoenix (+33%) saw the biggest jumps.

If you’re in the market for a new property or a hopeful first-time homeowner, the news isn’t so positive. In addition to inflated home prices, the cost of financing has risen substantially. 30-year mortgage rates have surged to 4.67%, nearly doubling the all-time low of 2.65% from January 2021. The amount of pending home sales nationally has fallen four months in a row.

Non-US Developed equities rose only 0.5% in March. Emerging Market equities fell 3.4%. While International stocks had outperformed US companies in January and February, their year-to-date losses now exceed the S&P 500 three months into 2022.

Oil prices increased another 5% in March, further fueling the recent gains in Energy stocks. Those gaudy year-to-date returns have not had much impact on the major benchmarks, however, given that Energy represents less than 4% of the S&P 500.

The US labor market added 431,000 jobs in March, which dropped the national unemployment rate to 3.6%. There are now 5.3 million more job openings in America than there are unemployed people (a new record).

January Market Recap

February 1, 2022 

Whoever said “January is the Monday of months” certainly had it right about 2022.

The stock market’s opening act of the new year left its audience running for the exits. Sobering realities of 7% inflation and a Federal Reserve certain to implement less favorable monetary policy hit investors like a Minnesota wind chill. The S&P 500 lost 5.3%, its worst month since the pandemic panic of March 2020. It was the worst January performance for stocks since 2009, when the S&P fell 8.6%.

Volatility spiked as the selling intensified. The Chicago Board of Exchange Volatility Index (“the VIX”) reached its highest mark in a year. With that came extreme intraday swings. The average spread between the S&P 500’s daily highs and lows in January was 2.06%, more than twice the average daily spread last year (0.97%). Put another way, a “normal” trading day last month saw stocks fluctuate the equivalent of 730 Dow points.

All but one of the 11 sectors in the S&P 500 were negative. Consumer Discretionary (-9.7%) and Real Estate (-8.5%) lost the most. The only sector to finish positive was Energy (+19%), which delivered remarkable outperformance thanks in part to sharply higher oil prices. Financials (-0.1%) also weathered the storm relatively well.

Index	January 2022	YTD 2022
Dow	-3.32%	-3.32%
S&P 500	-5.26%	-5.26%
NASDAQ	-8.98%	-8.98%

If you’re looking for a silver lining, the good news is that equities finished the month on a high note. The S&P 500 gained 4.4% in the final two days of January. At its low point on January 24, the S&P had fallen 12.4% from its intraday peak in only 13 trading days.

The NASDAQ was battered even more, falling 17.4% over the same period and finishing January with a 9% loss overall. Dating back to the pandemic lows two years ago, mega-cap technology companies have been some of the market’s best performers. Many of those same companies proved especially vulnerable last month.

Consensus expectations on Wall Street suggest the Federal Reserve will raise interest rates five times in 2022. Perhaps Fed Chair Jerome Powell can successfully navigate these troubled waters, but it will require a delicate balance between staving off inflation and appeasing investors who have grown accustomed to historically friendly monetary policy.

It was the minutes (notes) from the Fed’s December meeting, released on January 5, that indicated a March hike was coming and sent stock prices southward. Joe Biden then applied some political pressure on January 19 when the President stated that fighting inflation is the job of the Federal Reserve. “Given the strength of the economy and the pace of recent price increases, it’s appropriate to recalibrate the support that is now necessary,” Biden said.

Year-over-year inflation clocked in at 7% in January, up from 6.8% a month earlier and the highest such reading since 1982. The national unemployment rate fell below 4%. When you consider the Fed’s official mandates to promote “maximum employment, stable prices, and moderate interest rates” it becomes obvious why a shift in policy is upon us.

If we look beyond inflation and the Fed, there are still reasons for optimism. The US economy grew at an annualized rate of 6.9% in the fourth quarter. On an inflation-adjusted basis, American GDP grew 5.7% overall last year, the strongest annual growth since 1984.

Corporate earnings also continue to impress. With roughly one-third of S&P 500 companies already reporting, fourth-quarter earnings are on pace to increase 24% from a year earlier. If we hit that mark, it will be four consecutive quarters with earnings growth of 20% or more.

10-year US Treasury bonds finished January yielding 1.78%, the highest in two years. It was summer 2019 when 10-year Treasuries last eclipsed 2%, a threshold that holds symbolic significance and could provide short-term resistance.

Higher bond yields are not just an American trend. The 10-year German bund yield ended January above 0% for the first time since May 2019 (no, that’s not a typo). The 10-year Japanese Government Bond also rose to a five-year high.

International equities outperformed US stocks in January. Non-US Developed equities (measured by the MSCI EAFE Index) fell 3.6%. Emerging Market stocks, which lagged far behind US stocks in 2021, were flat.

West Texas Intermediate Crude oil jumped more than 17% last month. That corresponded with a 15% increase in US gasoline prices, which now average $2.55 per gallon nationally. Gold prices fell 1.7%.

November Market Recap

December 1, 2021

November didn’t end nearly as well as it began.

What started as another benign month with stocks drifting gently upward the first three weeks took a sudden turn for the worse. With Thanksgiving dinner still digesting and Black Friday bargain hunting in full force, stock prices sank significantly lower on November 26.

The Dow lost 905 points that day, due in large part to news about the latest COVID-19 variant – Omicron – and growing concern about how another wave of illnesses might slow the global economic recovery. If nothing else, it was a reality check that this pandemic is not yet over.

For the stock market, November was essentially three baby steps forward followed by a faceplant. Only two of the 11 sectors in the S&P 500 finished positive. Technology (+4.2%) seemed to benefit for the same reasons it did in 2020 (think: “Stay at home stocks” will weather pandemic problems better than most). Consumer Discretionary (+1.9%) also delivered monthly gains. Energy (-5.8%), Financials (-5.8%), and Communication Services (-5.2%) were dealt the biggest losses.

Index	November 2021	YTD 2021
Dow	-3.73%	+12.67%
S&P 500	-0.83%	+21.59%
NASDAQ	+0.25%	+20.56%

The relative outperformance of Technology companies allowed the NASDAQ to finish slightly positive last month and helped the S&P 500 lose less than 1%. Those numbers hide a more violent selloff in other areas of the market. All of the Dow’s 3.7% loss came in the final three trading days of November. Energy stocks lost 5.7% in the same 3-day period. Financials dropped 5.3%. Small-cap stocks (measured by the Russell 2000) fell 5.7%.

The discovery of Omicron in South Africa came after Austria initiated a nationwide lockdown earlier in November. Germany said it would consider similar measures. The volatility wasn’t entirely pandemic-driven, however. On November 22, Joe Biden announced his intent to re-nominate Jerome Powell to serve a second term as Chair of the US Federal Reserve, meaning Powell will maintain in that role for another four years.

Markets reacted favorably to the news, but with new job security in hand, Powell signaled the Fed may speed up its plan to reduce stimulus. In comments made to the Senate Banking Committee on November 30, Powell said the Fed may accelerate the tapering of its bond purchasing faster than the formal timeline announced four weeks earlier. Powell’s sudden willingness to become less dovish led the Dow to drop another 652 points.

Inflation, of course, is what’s behind the need for Powell and the Fed to adjust their policy. The latest data shows American consumer prices jumped 6.2% from a year ago, the most significant inflation in 30 years. The year-over-year rate of inflation had been 5.3% a month earlier. Powell is finally acknowledging these trends are not so transitory after all.

Oil prices surged 12.3% from September to October, which led to the US government’s decision last month to release 50 million barrels from our country’s strategic oil reserve. It’s a tool meant to increase supply and reduce prices. And it worked. After oil (and gasoline) prices had more than doubled in the previous 12 months, crude oil prices fell 21% in November. West Texas Intermediate Crude finished the month just above $66 per barrel (down from nearly $84 per barrel a month ago).

Bond yields initially climbed in November before retreating. The 10-year US Treasury yield got as high as 1.67% on November 22, then fell to 1.44% as equities sold off. Gold lost 0.7% in November.

The federal government’s long-awaited infrastructure package was officially signed into law last month. $1.2 trillion in spending will be allocated toward traditional infrastructure improvements (roads, bridges, airports, Internet access, etc.). A separate bill related to “human infrastructure” is still being debated in Congress.

September Market Recap

October 1, 2021

Anybody out there remember what a down-month feels like?

September snapped a 7-month winning streak for US equities as the S&P 500 finished lower than it began for the first time since January. The Dow, S&P, and NASDAQ all lost at least 4% in a broad-based selloff from recent highs.

Something to keep in mind as investors prepare to view September 30 statements: It’s the first time all year the S&P 500 has fallen as much as 5% from its highwater mark. Since 1980, the average peak-to-trough correction during each calendar year is 14.2%. Compared to the rest of 2021, September was disappointing. Compared to an average year, it barely qualifies as a selloff at all.

Only one of the 11 equity sectors in the S&P 500 moved higher last month. Energy (+9.3%) gets the blue ribbon for September performance. Financials (-2.0%) also held up better than most. Five sectors lost 6% or more, with Materials (-7.4%) and Real Estate (-6.6%) being the worst of those.

Index	September 2021	YTD 2021
Dow	-4.29%	+10.58%
S&P 500	-4.76%	+14.68%
NASDAQ	-5.31%	+12.11%

Some of the blame for September stock losses can be attributed to the fact we were just overdue for a pullback. Even then, there’s always news that spurs the selling. One event was the financial failing of Chinese real estate developer Evergrande, one of the 500 largest companies in the world (based on revenue) whose rapid growth in recent years was fueled by massive leverage.

The company reportedly has $300 billion of debt and is unable to make good on its loan payments. We’re still waiting to find out whether the Chinese government may bail out Evergrande in some capacity, but considering real estate and related industries make up as much as 30% of Chinese GDP, you can see why global markets are paying attention.

The US government’s debt ceiling is back in the headlines, something that happens every few years and inevitably contributes to short-term market volatility. The game of political football resumed in September, which led to threats of government shutdowns and “economic catastrophe” if Congress does not vote to legally increase the amount of debt our country is allowed.

Congress has increased America’s debt limit 14 times since 2001, never failing to do so despite a wide variety of political environments and party majorities. It will do so again. The only real questions are when, by how much, and whether it is done with bipartisan support.

Stubbornly high inflation is no longer a trend that should catch anyone by surprise, but those investors looking for an excuse to sell can still point toward rising costs for both businesses and consumers.

Crude oil prices rose nearly 10% in September and are higher than at any point in the last five years. Steel prices have more than tripled in the last 12 months. Lumber costs, which have fallen considerably since May, increased 20% in September.

The latest Consumer Price Index (CPI) inflation gauge rose 5.3% from a year earlier. That’s down from the 5.4% year-over-year increase reported in August. So while the pace of inflation is slowing, costs are still increasing. A steadily falling unemployment rate (5.2% nationally) and a glut of “Help Wanted” signs suggest the economy is strong, but rising wages will promote inflation as well.

There was speculation the September Federal Reserve meeting could result in the first tapering of stimulus since COVID hit. That proved premature as Fed Chairman Jerome Powell announced no policy changes. Powell’s previous comments made clear the Fed intends to cut back its asset purchasing prior to year-end. The “not yet” speech was well-received by stocks as the Dow gained more than 338 points on September 22.

Another Fed development worth tracking is how long Powell himself will remain in charge. His term expires early next year and it’s not yet clear whether Joe Biden will reappoint or replace him. Powell’s term has generally been viewed favorably, but a bloated Fed balance sheet, higher inflation, and the recent resignation of two Fed officials (for perceived conflicts of interest) mean it’s no sure thing Powell will keep his job.

The 10-year Treasury yield began September at 1.3% but rose all the way to 1.53% by month’s end. That increase hurt the returns for bond investors, who had benefitted from steadily falling yields since March.

Small-cap stocks fell at a similar rate to their large-cap cousins with the Russell 2000 losing 3% last month. Non-US Developed equities were down 3.3% in September. Emerging Markets fell 3.9%.