Market Commentary for the week of June 13, 2022

Much has been written about market downturns and how to handle them. A constant theme in these commentaries is that the markets must capitulate before we see a rebound, but we think that philosophy is relatively one-sided. We believe investors also need to experience emotional capitulation. This is to say that just when we tell ourselves that we simply cannot stomach anymore downturn in our accounts, the market tends to turn around. Have both the markets and our personal emotions found capitulation? From the market perspective some technical indicators say yes, some say no. On the personal side we seem to be fielding more phone calls from concerned clients than we were several weeks ago. 

We tell all clients that we do not know what the future has in store for us; it does feel like the market is trying to find a bottom. We may need to digest more down before a true bottom is found, but as we have said many times … capitalism will survive and that those that can stay the course will have a much better chance of being rewarded. 

“Be fearful when others are greedy, and be greedy only when others are fearful” – Warren Buffett

Until next time…

Darin & Greg

 

ECONOMIC REVIEW[i]

• Inflation as measured by the Consumer Price Index (CPI) increased more than expected through May. Headline prices, including food and energy, rose by 1.0%, while core prices, which exclude those volatile categories, rose by 0.6%.
  • Headline inflation is up 8.6% since this time last year; core prices are up 6% over the same period.

 

How does this impact you?

• Impact of the Consumer Price Index
  • Inflation continues to run hot as the immense amount of monetary stimulus injected in the system further roils markets. While quantitative easing has since flipped to quantitative tightening, current policy remains substantially looser that either the Fed would like, or economic conditions dictate.
  • The spike in headline CPI comes as no surprise for keen market participants tracking solidly elevated food and energy prices, which have shown little sign of easing.
  • Moving forward, monitoring rents, or more specifically owner’s equivalent rent – measuring the price it would cost a homeowner to pay if they were to rent their home, will be extremely important.
    • This portion of CPI makes up nearly 30% of the index, and the Fed can most easily and directly impact the housing market in its efforts to alleviate inflationary pressures.
  • With another Fed meeting sent to take place next week, the stage is all but set for another 50-basis point hike in the benchmark rate.

   A LOOK FORWARD¹

• Inflation as measured by the Producer Price Index (PPI) for the month of May will be released on Tuesday; economists expect headline prices to increase by 0.8% on a month-over-month basis and 10.8% on a year-over-year basis.

 

How does this impact you?

• Impact of the Producer Price Index
  • Fresh off a disappointing CPI reading just last week, expectations for May producer prices are equally as dour. Energy prices continue to place immense pressure on inflation indices, and unfortunately there is little the Fed can do to impact supply side issues. As such, those problems will need to be worked out further before we see inflation trend lower.
  • While prices have climbed to four-decade highs, markets have seen several months where inflationary measures have cooled – the news has not been all bad for the past 12 months. The major issue is that there has not been a sustained trend in price reduction.
    • For example, the April reading of both inflation measures was promising, however, barring a major downside surprise, a budding trend now looks doubtful.

 

 

MARKET UPDATE

Market Index Returns as of 6/10/221	WTD	QTD	YTD	1 YR	3 YR	5 YR
S&P 500	-5.04%	-13.62%	-17.60%	-6.65%	12.41%	11.91%
NASDAQ	-5.59%	-20.12%	-27.26%	-18.56%	14.10%	13.85%
Dow Jones Industrial Average	-4.56%	-9.05%	-12.78%	-7.15%	8.68%	10.50%
Russell Mid-Cap	-5.11%	-12.34%	-17.32%	-12.18%	9.15%	9.12%
Russell 2000 (Small Cap)	-4.37%	-12.83%	-19.39%	-21.22%	7.04%	6.19%
MSCI EAFE (International)	-4.65%	-10.51%	-15.80%	-16.04%	3.42%	3.05%
MSCI Emerging Markets	-0.53%	-7.10%	-13.58%	-21.69%	3.41%	3.09%
Bloomberg Barclays US Agg Bond	-1.52%	-5.02%	-10.65%	-10.56%	-0.68%	0.78%
Bloomberg Barclays High Yield Corp.	-2.33%	-5.96%	-10.50%	-8.50%	1.98%	2.97%
Bloomberg Barclays Global Agg	-2.26%	-7.95%	-13.62%	-15.93%	-2.68%	-0.48%

    OBSERVATIONS

• U.S. equities retreated for the week S&P down -5.04%
• Small caps also gave up ground but outperformed their larger counterparts with the Russell 2000 shredding      -4.37%
• International stocks outperformed domestic equities, but still in the red down -4.65%.
• Emerging markets were negative returning -0.53%.
• U.S. investment grade bonds were negative with the Bloomberg Barclays U.S. Aggregate Bond index down      -1.52%

 

 

• BY THE NUMBERS

DOWN A LOT - The S&P 500 is down 17.6% YTD (total return) through the close of trading last Friday 6/10/2022.  The last year when the index suffered a “double-digit” loss was 2008, losing 37.0% that year.  The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation.  It is a market value weighted index with each stock's weight in the index proportionate to its market value (source: BTN Research).     

 

FUNDING A RETIREMENT - The S&P 500 has averaged +9.8% per year (total return) over the 25 years ending 12/31/2021.  A lump-sum of $865,656 (in a pre-tax account) will sustain a 20-year payout of $100,000 per year (i.e., $2 million of gross distributions before taxes) assuming the funds continue to earn +9.8% annually.  This mathematical calculation ignores the ultimate impact of taxes on the account which are due upon withdrawal, is for illustrative purposes only and is not intended to reflect any specific investment or performance.  Actual results will fluctuate with market conditions and will vary (source: BTN Research).

 

SPENDING MORE, SAVING LESS - The nation’s personal savings rate, which soared during the early months of the pandemic, has now fallen back to below its pre-pandemic levels.  The savings rate was 7.8% in January 2020, rose to 33.8% in April 2020, and now has dropped back to 4.4% in April 2022.  The 4.4% rate is the lowest recorded in the United States since September 2008 (source: Bureau of Economic Analysis).

 

 

Reprinted with permission from BTN. Copyright © 2022 Michael A. Higley.

 

 

 

 

 

Economic Definitions

CPI (headline and core): Consumer prices (CPI) are a measure of prices paid by consumers for a market basket of consumer goods and services. The yearly (or monthly) growth rates represent the inflation rate.

Producer Prices - PPI (headline and core): Producer prices (output) are a measure of the change in the price of goods as they leave their place of production (i.e. prices received by domestic producers for their outputs either on the domestic or foreign market).

 

 

Index Definitions

S&P 500: The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

NASDAQ: The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Russell Mid-Cap: Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index, which represent approximately 25% of the total market capitalization of the Russell 1000 Index.

Russell 2000: The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 total market capitalization. The real-time value is calculated with a base value of 135.00 as
of December 31, 1986. The end-of-day value is calculated with a base value of 100.00 as of December 29, 1978.

MSCI EAFE: The MSCI EAFE Index is a free-float weighted equity index. The index was developed with a base value of 100 as of December 31, 1969. The MSCI EAFE region covers DM countries in Europe, Australasia, Israel, and the Far East.

MSCI EM: The MSCI EM (Emerging Markets) Index is a free-float weighted equity index that captures large and mid-cap representation across Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.

Bloomberg Barclays US Agg Bond: The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

Bloomberg Barclays High Yield Corp: The Bloomberg Barclays US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition,
are excluded.

Bloomberg Barclays Global Agg: The Bloomberg Barclays Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate, and securitized fixed-rate bonds from both developed and emerging markets issuers.

 

Disclosures

Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. Past performance cannot guarantee future results.

Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect again loss. In general, the bond market is volatile; bond prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed-income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Vehicles that invest in lower-rated debt securities (commonly referred to as junk bonds or high-yield bonds) involve additional risks because of the lower credit quality of the securities in the portfolio. International investing involves special risks do not present with U.S. investments due to factors such as increased volatility, currency fluctuation, and differences in auditing and other financial standards. These risks can be accentuated in emerging markets.

The statements provided herein are based solely on the opinions of the Advisor Group Research Team and are being provided for general information purposes only. Neither the information nor any opinion expressed constitutes an offer or a solicitation to buy or sell any securities or other financial instruments. Any opinions provided herein should not be relied upon for investment decisions and may differ from those of other departments or divisions of Advisor Group or its affiliates.

Certain information may be based on information received from sources the Advisor Group Research Team considers reliable; however, the accuracy and completeness of such information cannot be guaranteed. Certain statements contained herein may constitute “projections,” “forecasts” and other “forward-looking statements” which do not reflect actual results and are based primarily upon applying retroactively a hypothetical set of assumptions to certain historical financial information. Any opinions, projections, forecasts and forward-looking statements presented herein reflect the judgment of the Advisor Group Research Team only as of the date of this document and are subject to change without notice. Advisor Group has no obligation to provide updates or changes to these opinions, projections, forecasts and forward-looking statements. Advisor Group is not soliciting or recommending any action based on any information in this document.

Securities and investment advisory services are offered through the firms: FSC Securities Corporation, Royal Alliance Associates, Inc., SagePoint Financial, Inc., Triad Advisors, LLC, and Woodbury Financial Services, Inc., broker-dealers, registered investment advisers, and members of FINRA and SIPC. Securities are offered through Securities America, Inc., a broker-dealer and member of FINRA and SIPC. Advisory services are offered through Arbor Point Advisors, LLC, Ladenburg Thalmann Asset Management, Inc., Securities America Advisors, Inc., and Triad Hybrid Solutions, LLC, registered investment advisers. Advisory programs offered by FSC Securities Corporation, Royal Alliance Associates, Inc., SagePoint Financial, Inc., and Woodbury Financial Services, Inc., are sponsored by VISION2020 Wealth Management Corp., an affiliated registered investment adviser. Advisor Group, Inc. is an affiliate of these firms. 4786411