AE Wealth Management: Weekly Market Insights | 5/22/22 – 5/28/22

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Markets end their 8-week losing streak

Is the losing over for markets?

After nearly two months of down weeks, the S&P 500 and the Dow rallied last week, just managing to avoid bear territory. Two solid days of gains helped markets recoup some of the losses, but both indices remain in solid correction territory. Meanwhile, the tech-heavy Nasdaq is mired in a bear market.

The market initially latched on to an optimistic earnings report from JP Morgan, then the Federal Reserve’s latest meeting minutes, and positive earnings from high-end retailers such as Nordstrom and Williams-Sonoma fueled the run late Wednesday through Thursday. The Personal Consumption Expenditures (PCE) report released Friday (the Federal Reserve’s preferred measure of inflation) showed a modest improvement in April figures — registering the first slowdown in price hikes since November 2020.

After the beating Walmart and Target took two weeks ago, reported earnings from Dollar Tree and Dollar General offered some optimism. The consumer softness seems to be falling along two lines: The wealthy are spending at premium retailers, while the rest of the consumers have moved downstream from mainline retailers (Walmart and Target) toward ultra-discounters, which may not be a good sign.

The second reading of first-quarter gross domestic product (GDP) was actually worse than the initial reading, coming in slightly lower at -1.5% vs. -1.4%. (The consensus expectation had been -1.3%.) However, the new reading didn’t deter the markets. The minutes from the Fed’s latest meeting didn’t dampen enthusiasm, either, since they didn’t offer any additional insight from what markets already expected. In fact, the minutes stated the Fed would remain “flexible” as we moved forward, which the market took to mean that the Fed would pause rate hikes if the situation called for it.

Although it’s good that the market stopped sinking last week, investors should remain vigilant: Inflation is still with us, the war in Ukraine is still going, oil is close to $115 per barrel, and gas prices continue to climb even though summer hasn’t even started. Plus, the Fed has only raised rates by 0.75% so far and hasn’t started to divest its balance sheet, mortgage rates have nearly doubled since this time last year, and supply chain hiccups are still with us. Nevertheless, the market needed to run. We may have been oversold, and the market needed some relief given the current conditions.

What the 10-year Treasury note is telling us about the Fed

The yield on the 10-year Treasury note hit 3.15% right after the Fed’s May Meeting, in which the Fed raised rates from 0.25% to 0.75% and said it may raise rates another 0.5% at each of its next two meetings. There was also tough talk of ending inflation by raising rates and winding down the Fed’s balance sheet to tighten lending and liquidity.

So where’s the 10-year yield three weeks later? As of last Friday, it stood around 2.7% — actually lower after the meeting in which rates were raised and prior to the meeting in which rates will almost certainly be raised by another 0.50%. What does that say about the Fed and how markets are viewing its upcoming meeting? Let’s call it “disdainful loathing.” The market doesn’t believe the Fed will raise rates; instead, declining yields suggest the market believes the Fed will not raise rates as aggressively as indicated if markets slide further or the economy deteriorates. The market’s thinking is risky, and the reading of the last meeting’s minutes clearly was sufficiently soft to allow the market to believe the Fed wouldn’t follow through.

The volatility index (VIX) has been stuck in the 25-30 range. Although elevated, it shows there is little fear out there, another sign that markets are disrespecting the Fed. As mentioned earlier, there are still so many negatives, and the economy seems to be slowing. It seems the Fed is still unwilling to do what needs to be done and is expecting the economy and the markets to bail it out from having to raise rates. But the market isn’t playing along, and the economy could suffer with a prolonged period of elevated inflation and sluggish growth.

However, if the Fed steps up and does what needs to be done, then the adage “Don’t fight the Fed” may bite the markets, especially when the Fed is raising rates. We need to see how this plays out, but it doesn’t bode well for the near term.

Coming This Week

• It’s a short week, but it’s a full one. We’ll have some major Fed hawks swooping in to give their assessment on the direction rates are going. James Bullard (St. Louis Fed) and Loretta Mester (Cleveland Fed) are both inflation hawks and will give comments on Wednesday and Thursday, respectively.
• All eyes will be watching for more deterioration in the consumer confidence numbers on Tuesday.
• The latest Job Openings and Labor Turnover Survey (JOLTS) report on Wednesday, ADP monthly employment numbers on Thursday and Bureau of Labor Statistics (BLS) employment situation on Friday will provide lots of May employment data. We’ll be able to determine if job growth is cooling, which will hopefully slow inflation and may cause the Fed to pause its rate hikes.
• Many bonds will be auctioned this week, so there could be some excitement there.
• Finally, we’ll also get housing data (which is clearly slowing), construction spending (ditto), factory orders, motor vehicle sales and productivity readings this week. It’s all useful data to gauge whether the economy is hanging in there or is sliding toward an official recession.

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