Down, Up and Sideways

It was a month of dramatic ups and downs that in the end went mostly nowhere. On May 2, the S&P rose more than 2.0% (WSJ.com, 5 /4/22) as investors responded positively to comments from Fed Chair Powell on interest rate policy. Twenty-four hours later, it dropped more than -3.0%, a round trip that neatly summarized the volatility confronting investors in the U.S. and around the world.

The bond market wasn’t much better. Early in the month, yields on the 10-year treasury topped 3.0% for the first time since 2018 (WSJ.com, 5/2/22), putting an exclamation point on a rout that resulted in what one Wall Street Journal columnist called the “worst bond market since 1842.” But volatility prevailed here, too, and bonds rallied, pushing the yield down to 2.74% in late May. By months-ends yield had climbed again, ending just short of 3.0%.

The economic impact of the war in Ukraine continued to reverberate, exacerbating food shortages around the globe and driving up the price of oil. Inflation, as captured in the Consumer Price Index (CPI) edged down slightly, to 8.3% in May from 8.5% (CNBC.com, 5/11/22) the month before, both on an annualized basis. The Fed moved ahead with its biggest interest rate (WSJ.com, 5/4/22) hike since 2000, lifting the funds rate by 50 basis points on May 4 and approving a plan to start unwinding its $9 trillion asset portfolio.

U.S. stocks mostly continued on their downward path; as of Friday, May 20 the S&P had fallen for seven straight weeks, the longest such streak (NYTimes.com, 5,/20/22) since the Dot Com bust of the early 2000’s. The month’s last full week was a different story, however, as a powerful rally lifted all three of the major averages by more than 6.0% (WSJ.com, 5/27/22). The result: exaggerated volatility resulting in a net gain of slightly less than 1.0% at close of month.  

Employment stays strong, home sales fall

The rise in rates began to drag on the housing market where rates on a 30-year mortgage rose to 5.27% (WSJ.com, 5/27/22), the highest since 2009. Both new and existing home sales fell in April, off -16.6% and -2.4%, respectively. Meanwhile, home prices were up, rising 20% (WSJ.com, 5/31/22) year-over-year through March, the biggest rise in 35 years, according to the S&P CoreLogic Case-Shiller National Home Price Index.

Jobs remained a bright spot, with 428,000 new positions (WSJ.com, 5/6/22) added in April, the twelfth straight month of gains above 400,000. The unemployment rate stood at 3.6%, slightly above the 3.5% pre-pandemic level.

Consumers did indeed spend more in April but were apparently tapping savings to do so. The spending rate was up by a seasonally adjusted 0.9% (Bureau of Economic Analysis, 5/27/22) even as the savings rate fell to 4.4% from a revised 5% in March. The U.S. dollar played against type: in the past inflation has meant weakness, but this time around it’s more than holding its own with the U.S. Dollar Index (WSJ.com, 5/8/22), which tracks the currency against a basket of others, reaching highs unseen since 2002. 

Defensive ETFs attract investors

With bonds, stocks, and crypto selling off – and gold mostly going nowhere – there have been few places to hide in this market. One area that has attracted investors has been defensive-oriented exchange-traded funds (ETFs) including those focused on consumer staples, healthcare, utilities, real estate, and commodities.

As May came to an end, the outlook remained murky (no surprise). In spite of the ongoing market decline equity valuations remained somewhat elevated based on historical comparisons, trading at a price/earnings ratio of 17.1 (EarningsInsights/Factset, 5/27/22) based on forward 12-month earnings, according to Factset.  This was below the five-year average of 18.6 but above the 10-year average of 16.9.

The word “recession” has been heard more frequently from economists and market commentators, with many calling for a slowdown early next year. Still, no one really knows including the Fed, and there have been some signs that we may have hit both peak inflation and, possibly, “peak bearishness,” as a Citibank analyst wrote (Yahoofinance.com, 5/31/22), a more positive sign for investors.

May’s jobs number, out as this was going to press, saw 390,000 new positions added and the unemployment rate steady at 3.6%. While this alone is unlikely to settle the ongoing growth vs. recession debate, it’s evidence that many employers remain optimistic, a good sign for continued expansion at least over the near term.