This bi-weekly financial section is published in USA Today's: The Town Journal. This publication is distributed in Bergen County New Jersey, covering 4 towns with roughly 22,000 residents.
"HELLO, GOODBYE" WROTE THE BEATLES.
US Markets
With April underway, we can say hello to this year’s second quarter and goodbye to its first. This year’s first quarter will be remembered for years. Depending on your investments, your results were remarkably different. Investment results were not only extremely varied from asset class to asset class, but also inside of each asset class. As an example across asset classes, during the first quarter of this year, a broad bond fund (symbol: AGG) lost 7%, the S&P 500 (symbol: SPY) lost 4.69%, while a basket of commodities (symbol: DBC) gained 30.70%. As an example within an asset class, during the first quarter of this year, the large-cap energy sector (symbol: XLE) gained 41.89% while the large-cap communication services sector (symbol: XLC) lost 12.36%. Just two weeks into this second quarter and we kick off earnings season with some major financial players reporting. These include Wells Fargo, Goldman Sachs, Citi Group, Morgan Stanley, Black Rock, and, not a financial name but of note, we have United Health Group which market participants will certainly be watching.
Last week, US equity markets had a tough time. Market participants are still asking if have sustainable improvement or if we are setting up the next leg lower for the major stock indices, though bearish evidence continues to accumulate. We are seeing more stocks making new lows 52-week lows than making 52-week highs. We are also seeing groups that typically lead bull markets higher, such as semiconductors, transports, homebuilders, retail, and technology, now faltering. Concurrently, we are seeing groups that market participants typically purchase to ride out volatility and uncertainty show strength. These include utilities, and food & beverage retail names and producers. We are also seeing strength from groups that outperform in inflationary periods. These themes include metals, mining, chemicals, and companies that deal in commodities.
Last week, the S&P 500 finished with a loss of 1.18%. The tech heavy Nasdaq 100 finished with a loss of 3.51%. The Dow Jones Industrial Average finished with a loss of 0.28%. The small-cap Russell 2000 finished with a loss of 4.67%. 5 of 11 S&P 500 sectors closed higher. These were led by energy, real estate, and health care.
Market Moving Headlines
Macro-economic worries and geopolitical turmoil have been dominating the stock market for months. Unfortunately, nothing has changed. These issues have not faded away. In fact, they might be more troubling now than ever. Inflation has not cooled. There is no ceasefire in Ukraine. Cities in China remain locked down. The Federal Reserve has not changed its policy stance. In fact, this is the first time in more than 40 years we are entering into a rising interest rate environment. Rates have been falling since the 1980s. Moving forward, the economic landscape is going to be shocking for many market participants though predictable for the studied.
The Federal Reserve has been all over the news last week. Its tone now is antithetical to its tone over the past weeks and months. The Fed is going out of its way to telegraph its intentions of a now accelerated pace of rate hikes and its plan to reduce its balance sheet which includes holdings of US Treasury Bonds and Mortgage-Backed Securities.
On Tuesday, 04/05, domestic vehicle sales were released by the US Bureau of Economic Analysis. Vehicle sales, considered an important gauge of the strength of consumers, was slightly down last month. That said, the chart shows demand is stable though below pre-covid levels.
Also on Tuesday, 04/05, we received the Services Purchasing Managers’ Index (Services PMI). This data is collected from a representative panel of over 400 private sector companies covering transportation, communication, financial intermediaries, business/personal services, and hotels/restaurants. It tracks variables such as sales, employment, inventories, and prices. March’s reading was positive and above pre-pandemic levels. There was an increase in business activity, new orders, and employment, though output prices increased and were passed on to consumers due to rising input costs paid by the businesses.
On Wednesday, 04/06, the Mortgage Bankers Association released data on mortgage applications. Mortgage demand sank while mortgage rates jumped. Applications were down for a 4th week in a row, and that makes applications down the last 10 of 13 weeks. The 30-year fixed mortgage rate is up to 4.9% making it 1.54% higher than it was last year. The rate is now at a level not seen since 2011. The lack of inventory, higher purchase prices, and now increasing mortgage rates are disproportionately affecting affordability for first-time buyers and those not in the upper echelon of earners.
On Thursday, 04/07, as always, we were given the unemployment data for initial and continuing jobless claims. The number of Americans filing new unemployment claims decreased by 5,000 to 166,000. This number is back to levels not seen since 1968 and came well below market expectations of 200,000. Continuing jobless claims rose to 1.52 million, higher than the forecast of 1.31 million. These numbers illustrate the tight job market and robust labor demand.
The economy goes through cycles. A complete cycle is one where economic expansion is followed by economic contraction. While it is impossible to know for sure, by anybody, we are likely in the middle to late expansionary part of the cycle based on the evidence of leading economic indicators and the conditions in the financial markets. This part of the cycle generally takes months to years to play out before moving into the contractionary part of the economic cycle. The Federal Reserve begins to raise interest rates to curb inflation and consumer demand. This is what is happening now. The rising rates will eventually weaken consumer sentiment, which we are beginning to see now, which eventually weakens industrial production which increases unemployment. We are not seeing these things yet.
This explanation is not to suggest that we are in for a period of doom and gloom immediately. This thinking ahead, months to years, is an exercise to contextualize our current position in economic and market cycles. This understanding leads to informed and profitable investment decisions.
International markets
Similar to US equity markets, last week was tough on international markets as well. Developed and emerging markets finished lower, while frontier markets finished with a small gain. Again, similar to the US markets, year-to-date, the broad international indices are also down. If you are a regular reader of the Town Journal’s financial section, you know that we can find strength under the surface of these broad international indices. While our year-to-date leaders from Latin America took a break last week and closed lower, other year-to-date leaders including Norway, The U.K., Turkey, Qater, and UAE closed higher.
Fixed Income
The bond market had another ugly week. 84%, or 26 of 31, of the bond ETFs we track at East Coast Charts Research recorded 52-week or all-time closing lows. The greatest carnage was seen in the international space, while US government and corporate bonds suffered the most domestically. Longer duration US Treasury issues sold off harder than the shorter ones.
The yield on the benchmark US 10-year Treasury Note began this year near 1.5%. Last week it closed above 2.7%. This leaves us roughly just 50 basis points (0.50%) shy of its highest level in over a decade. Remember, rates rise due to decreasing demand for debt instruments, as well as inflation expectations, and monetary policy of the Federal Reserve.
Commodities
As highlighted in the introduction, the commodity universe of investments continues to be highly profitable. Last week we saw gains in natural gas, gold, silver, orange juice, sugar, wheat, oats, and soy. It is notable that lumber continues to fall with equity groups including homebuilders and construction. Gold closed up at $1,945.60 per ounce. WTI Crude Oil closed down at 98.26 a barrel. Gasoline also finished last week slightly lower. The Us Dollar finished higher at $99.75.
The Week Ahead
Next week, earnings season shifts into high gear which we have already covered. The highly anticipated measures of inflation known as the Consumer Price Index (CPI) and Producer Price Index (PPI) will be released. Along with retail sales data, we also get the University of Michigan’s Consumer Sentiment Index for April and the unemployment numbers on Thursday.
As always, thank you for reading. Stay flexible, and remain open to better-than-expected outcomes and worse-than-expected outcomes.
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