The hope for some immediate relief to investors faded as on as the markets faced their worst week since March 2020, with the S&P entering bear market territory early in the week. Consumers are not in a much better situation, as inflation lingers on the budgets of Americans everywhere and the summer saga of travel-related increased gasoline consumption will be met with rising energy prices. Regardless of the current market and economic environment, we must remember the value of staying invested and opportunities presented during periods of turmoil.

Markets (as of 6/19/22; change since 1/1/22)

Global Economy
Treasury Secretary Janet Yellen provides little relief on the inflation front, stating that high prices are expected to continue rising for the remainder of the year, coupled with a prediction of slowed economic growth. Chart 1 depicts the probability of a U.S. recession.

Chart 1: Probability of U.S. Recession

The tried and true “balanced” portfolio allocation model (60% stocks and 40% bonds) is set to endure a worse quarter than any during the bear market of 2008 (Chart 2). Unlike the era of the Global Financial Crisis, bonds are offering little relief to the sharp pains of the equities markets. The top 1% of wealth in the U.S. lost over $1.5 trillion this quarter, as they own more than half of all equities held in America.

Chart 2: Quarterly Change in 60/40 Portfolio

Policy and Politics

• Concerns are growing over the international status of the Taiwan Strait, as the Biden Administration interprets the assertive language used by Chinese officials in Beijing to describe the nautical powerhouse.
  
• Colombia has followed in the footsteps of previous Latin American countries before them and elected their first radical leftist, President Gustavo Petro, in a close race with his corporate-centered opponent Rodolfo Hernandez. Investor concerns around the situation are growing as Petro’s plans include phasing out oil production/consumption, tax increases on the wealthy, and creating a stronger bond with its neighbor, Venezuela.

What to Watch

• Fed Chair Jerome Powell’s semi-annual Congressional testimony begins on 6/22/22 at 9:30am EST and continues 6/23/22 at 10:00am EST.
• Initial Jobless and Continuous Claims report will be released on 6/23/22 at 8:30am EST.
• The final Michigan Consumer Sentiment report will be released on 6/24/22 at 10:00am EST.

Chart 3: Primary Mortgage Market Survey

by Jonathan Susser, Investment Technology Associate
Little seems to be changing week-to-week in terms of consumer sentiment and the markets—that is that both are hitting recent lows. Russia’s invasion of Ukraine rages on, inflation hits a multiple decade high, and COVID remains a concern in China due to city-wide quarantines and lockdowns. Despite all of these apparent headwinds, history tells us that markets, even violently turbulent ones, recovery and investors are best suited with proper planning and commitment to long-term strategies.

Markets (as of 6/10/22; change since 1/1/22)

Global Economy
The average price of a gallon of gasoline in the USA broke the $5 per gallon threshold on Friday for the first time, contributing to high inflation across various industries, including food and other necessities. Chart 1 below illustrates the average price of gasoline on a state-by-state basis.

Chart 1: State Gas Price Average

U.S. inflation numbers hit 8.6% on an annualized basis in May, making the month’s rate the highest since December 1981. Charts 2 and 3 showcase both the year-over-year CPI changes as well as CPI changes across industries from this year alone.

Chart 2: Consumer Price Index, Change from a Year Earlier

Chart 3: Consumer Price Index, Change since January 2021

Policy and Politics
The leaders of several European Union members will be meeting with President Zelensky later this week in order to discuss recent Russian gains in Ukraine. Zelensky has requested additional weapons and arms from Western countries to help combat Russia’s invasion attempt.

Mexican president Andrés Manuel López is attempting to nationalize several foreign-owned private companies’ energy assets, such as a fuel import terminal owned by KKR & Co and an 1,100-megawatt power plant owned by Iberdola SA. López is hoping to shift to a “Mexico-first” policy path focused on the domestic producers of natural resources. Chart 4 shows the annual change in Mexico’s GDP vs the U.S. under several presidents’ tenures.

Chart 4: Mexican GDP Growth versus the U.S.

What to Watch

• Month-over-month U.S. business inventories to be released on 6/15/22 at 10:00am EST.
• U.S. Building Permits data to be released on 6/16/22 at 8:30am EST.
• U.S. Housing Starts will be announced on 6/16/22 at 8:30am EST.

by William Henderson, Chief Investment Officer
Continued strong employment data and little movement on inflationary pressures give us no reason to expect the Fed to veer off their hawkish path towards higher interest rates, and prompted stocks and bonds to sell off last week. 

Markets (as of June 3, 2022, Weekly Returns, Year-To-Date Returns) 

In any normal economy (over the past 20+ years), near-record low unemployment, strong jobs data and a healthy labor participation rate, would signal a growing economy and give the stock market reason to celebrate. Well, not this year; with inflation running at 40-year highs, a war raging in Europe, supply shortages, and a lingering global pandemic throwing such a pall over the markets that nothing stems their move lower.  

The approximately 1% drop in each major stock market index last week came after the previous week’s 7% rally in prices so a modest pullback was not too unexpected. Along with this modest pullback, we have seen a decline in the index that investors use to measure volatility. The Chicago Board of Options Exchange (CBOE) Volatility Index (VIX) moved down to a level of 25 on Friday from a recent high of 35 on May 9. A falling VIX typically points to calming markets rather than the violent 500-point swings we have seen earlier in the year. (See the chart below from the Federal Reserve Bank of St. Louis showing the VIX). 

While volatility may be declining several key Wall Street players are sounding the alarm on financial conditions and related market expectations. What puzzles us is that their concerns are not new, unique, or unknown to the markets. They point to supply chain disruptions, global inflation, higher interest rates, Russia/Ukraine war, and China’s COVID lockdowns as major disruptors to the markets and the economy. We would counter that with the strongest labor market we have seen in decades, near-record low unemployment, consumers and corporations that are flush with cash, and a solid housing market that gives the U.S. economy enough protection to weather a financial storm. Recession risks have been mentioned since the yield curve inverted earlier this year but given the labor conditions a recession seems a long way off. Lastly, inflation, while certainly still running hot and impacting consumer confidence, has recently started to temper, and we will get an important indicator this Friday when the Consumer Price Index report is released for May 2022. A month earlier, the government reported that inflation accelerated in April at an 8.3% annual rate—slightly below the previous month’s 8.5% figure, which was the highest since 1981.  With such poor returns in stock and bond markets for the year, it is hard to see a calm pathway for the remainder of the year, but our economy is 65-70% consumer-driven and much of that is service related rather than goods related. Inflation has thus far largely impacted goods rather than services. Consumers are showing amazing resilience in service-related spending on things like cruises, movies, and restaurants all while they continue to hoard cash and pay down debt. The market headwinds are neither new nor unknown, but they are persistent and that is what is worrying our friends at the Fed. The Fed will keep raising interest rates as long as inflation is persistent and the impact on the economy from higher rates is nominal. Our objective as investors, not market timers or traders, is to focus on long-term investing and planning and to ignore the noise.