June 2022 Market Perspective

Looking back to May

The U.S. equity markets experienced some dramatic selling early and mid-May, primarily on concerns of slowing economic growth.  But late month rallies helped the markets get almost back to even, with the Dow and S&P 500 posting small gains of 0.33% and 0.18%, respectively.  The NASDAQ was unable to recover from the early losses, dropping 1.93% for the month.

Improving fundamentals helped investor sentiment amidst the volatility.  According to Bloomberg Intelligence, as of May 27, 2022, S&P 500 earnings growth for the 1st quarter was 9.1% with 98% of the companies reporting.  First quarter earnings growth was impressive given analysts’ estimates of only 5.2% and persistently high inflation throughout the quarter.  Fundamentals drive long-term market performance, so we believe the 1st quarter’s earnings growth is a good sign for long-term performance.

The foreign equity markets fared a bit better than the U.S. markets, though both developed and emerging markets experienced significant selloffs before rallying late-month and posting small gains.  The MSCI EAFE index and the MSCI Emerging Markets index posted gains of 0.75% and 0.47%, respectively.

Falling long-term interest rates helped the bond market also post small gains, with the Bloomberg U.S. Aggregate Bond index gaining 0.64% in May.  The Bloomberg U.S. Corporate High-Yield Bond index gained 0.25%, making the first monthly gain for the index this year.

Looking to June and Beyond

May’s consumer price index (CPI) was released Friday, June 10, and came in at 8.6% year-over-year, and 1% month-over-month.  This is the highest reported CPI since December 1981.  Analysts expected May CPI to come in at 8.3%.  Core CPI, which excludes food and energy costs, was reported as 6%, while analysts were looking for 5.9%.  The unexpectedly high inflation immediately caused a sell-off in the Dow, S&P 500 and the NASDAQ.

Last Friday’s inflation report changes everything regarding what the Federal Open Market Committee (FOMC), the policy-setting arm of the Federal Reserve, may do when they meet June 14 – 15.  Before then, the Fed had been very transparent with their plans to raise interest rates by 0.5% at this meeting, and another 0.5% when they meet July 26 – 27.  Analysts are now saying that the 0.5% rate increase may be off the table and a rate hike of 0.75% or even 1% may be the direction the Fed takes to battle inflation.   This uncertainty added to the extreme volatility last Friday.

Recalling the economic definition of inflation as too much money in the economy (demand) chasing too few goods and services (supply), conventional wisdom is that the FOMC has few tools at its disposal to dramatically affect supply-side inflation.  This conclusion was supported by a rare bipartisan agreement between economists Austan Goolsbee, advisor to President Obama, and Stephen Moore, advisor to President Trump – also agreeing that it is not known at this time whether the current inflation has been caused by increased monetary stimulus and money supply (demand-side), or decreased goods and services being created by the economy (supply-side).

Larry Fink, CEO of Blackrock, the world’s largest investment manager, chimed in on the current state of inflation.  In a recent interview with Bloomberg, Fink believes that inflation will not subside by year’s end, that it may be with us for years and it is recognized that it is likely policy-generated and supply-generated.  He sees demand as being back to pre-pandemic levels, and that supply shocks have created the price increases, aggravated by COVID and lockdowns as well as the war in Ukraine.

Although economic growth may be slowing, it has certainly not fallen off a cliff.  Rather, industry projections for gross domestic product (GDP) are calling for 2.6% in 2022 and 2% in 2023.  The market has most likely priced in several future rate hikes as well as inflation being around for the time being.  The focus remains on the sustainability of profits and profit growth.  As noted above, 1st quarter 2022 profits were above analysts’ expectations.

We have made several changes to our PPS managed portfolios in an effort to capitalize on those areas of the economy that are benefiting from the current environment.  The result, as previously noted, is a barbell approach – owning the S&P 500 and value stocks on one side, and alternative investments that are largely not correlated to the stock market on the other.  We continue to monitor and track each PPS portfolio and its individual holdings on a daily basis.