If You Don’t Like the Weather Now…

By Ben Norris, CFA, Securities Research Analyst, Associate Vice President
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A single word sums up the markets last week – wild. The busiest week of the 2nd quarter earnings season, several headline worthy employment figures released, and a Federal Reserve meeting that has been hotly anticipated – all created an environment ripe for market volatility. Monday started off strong despite intraday prices swings and the major indices close higher. Notably, the yield on the 10-year U.S. Treasury Note rose above 3% for the first time since December of 2018 after seeing an historically rapid rise – the yield on 10-year is up from 1.5% at the end of 2021 and up from as low as 0.5% in mid-2020. Generally, interest rates have been abnormally volatile in 2022 as investors scramble to reposition their portfolios for a higher rate environment. I wouldn’t be particularly surprised if volatility remained elevated through the remainder of the year given that the Fed is expected to raise rates several more times and inflation has proven stickier than the Fed expected.

Tuesday’s markets were similarly volatile, but the major indices were again able to close in the green as the Fed began its two-day Federal Open Market Committee (FOMC) meeting. The Department of Labor indicated that job openings hit a record high of 11.55 million in March, going back to the year 2000 when the dataset began. Similarly, job quits totaled 4.54 million as employees remain confident in their ability to find new jobs. The labor market has been in focus lately as businesses struggle to find workers to fill openings – small businesses have been hit especially hard as they face disadvantages in terms of compensation and benefits relative to larger employers. Some economists worry that the competition for workers could continue to feed into higher inflation as wages are pushed higher. Unfortunately for employers, competition will likely remain high – there are nearly twice as many job openings as there are job seekers.

Things got interesting on Wednesday with the Fed announcing its May FOMC policy decisions. As expected, Fed policymakers opted to raise target interest rates by 0.5%, following their March decision to raise rates by 0.25%. This is the largest single hike since 2000. As a refresher, the FOMC cut target rates to a range of 0-0.25% in March of 2020 in an effort to prop up the economy amid pandemic lockdowns. The current target rate is now 0.75-1.0% with expectations that the target could be as high as 2.5-3.0% by the end of 2022. The swift pace of rate increases is a direct response to inflation that has remained at historic highs. The FOMC also indicated that it plans to shrink the size of the Fed’s balance sheet – the assets (mostly U.S. Treasuries and mortgage related bonds) they have purchased as a part of their economic stimulus campaign. The purchase of assets was an attempt to increase the availability of credit which in turn has a stimulative effect because financial institutions are more likely to lend money. When the Fed allows the balance sheet to shrink (by letting bonds mature without buying replacements) it has the opposite effect and tightens the amount of credit available for lending, a clear move to tighten monetary policy and reign in inflation. After reading all that, it may come as a surprise to hear that stocks were sharply higher on Wednesday. The S&P 500 (SPX) ended the session up 3%, the largest single day gain since May 2020. Investors seemed reassured by Fed Chairman Jerome Powell’s indication that coming rate hikes would 0.50% and not a more aggressive 0.75%.

As good as markets were on Wednesday, they were correspondingly worse on Thursday. The S&P 500 lost 3.6% on the day. Yes, the best single session performance of 2022 was immediately followed by the worst single session. There was nowhere to hide for traders as all 11 S&P sectors closed in negative territory. Many were wondering how the market could reverse so starkly after such a strong performance on Wednesday. I have two answers here. First, it seems investors had more time to consider the FOMC announcement and the prospect of the Fed targeting rates near 3.0% finally sunk in. Second, large daily moves in markets, whether positive or negative, tend to be clustered. And they also tend to be near bear markets – declines of more than 20% from a recent high. While the S&P 500 isn’t in a bear market, the Nasdaq Composite (COMP) entered bear market territory last week. Thursday’s losses all but erased the prior three days’ gains.

Friday was also a downer, though not quite as terrible as Thursday. While most stocks were down, the Energy sector was a notable positive as commodity prices remain elevated and corporate earnings came in better than expected. In contrast, large growth-oriented stocks fell sharply as rising interest rates weighed on shares. The narrative that emerged on Friday was that the even with higher rates and a shrinking balance sheet, the Fed might still have trouble combatting inflation and is increasingly at risk of pushing the economy into a recession.

The title of this week’s piece is a variation of a quote attributed to Mark Twain, who once said “If you don’t like the weather in New England now, just wait a few minutes.” Growing up in Nebraska, I heard this refrain numerous times as midwestern weather patterns seem to fluctuate just as much as they do in New England. Unfortunately, it seems stocks have taken to this pattern lately as well. After a strong start to the week Thursday and Friday’s losses were enough to push all three major averages back into negative territory. The S&P 500, Nasdaq Composite, and DJ Industrial Average lost 0.2%, 1.5%, and 0.2% respectively. While it symbolically rained last week, it often seems that the clouds clear when you least expect it, giving way to sunnier days. Investors should take Mark Twain’s quote to heart and stick around for the sunnier days ahead – stocks have historically been the best way to grow wealth and beat inflation, and over the long term we don’t see that fact changing.

This week’s slate of economic data is notably less packed than last week. There are numerous inflation updates as well as the normal weekly employment numbers.

Date Report

Previous

Consensus

Monday 5/9/2022 Consumer Inflation Expectations 1 & 3 Year

6.6%, 3.7%

Tuesday 5/10/2022 NFIB Small Business Index

93.2

92.9

Q1 Real Household Debt (SAAR)

2.5%

Wednesday 5/11/2022 Consumer Price Index (y/y)

8.6%

8.1%

Core CPI (y/y)

6.4%

Federal Budget Deficit

-$226B

-$220B

Thursday 5/12/2022 Initial Jobless Claims

200,000

191,000

Continuing Jobless Claims

1.38M

Friday 5/13/2022 April Import Price Index

2.6%

0.6%

May UMich Consumer Sentiment Index

65.2

64.4

UMich 5-year Inflation Expectations

3.0%

 

Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.