Money Growth Is Something; Nothing’s Free

May 23, 2022

By Ben Norris, CFA, Securities Research Analyst, Associate Vice President

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Through last Friday, the Dow Jones Industrial Average (DJIA) marked eight straight weeks of losses – the longest streak in roughly 100 years. Similarly, the S&P 500 (SPX) and NASDAQ Composite (COMP) saw their seventh straight lower week. The DJIA lost 2.90% last week while SPX and COMP lost 3.05% and 3.82%, respectively. Mega cap stocks were hit particularly hard last week and the equal-weighted version of the S&P 500 fared better than the cap-weighted SPX, losing just 2.34%. From a sector perspective, both Consumer Staples and Consumer Discretionary got crushed last week, losing 8.12% and 7.82%, respectively. Consumer Staples tends to act as a safe-haven sector that investors shift to during times of market turbulence. In fact, the sector is down just 8.31% year-to-date versus an 18% loss in SPX.

Two things happened last week that played into the two sectors’ weakness. First, several large companies in the consumer space reported disappointing earnings and forward guidance as supply chain issues, rising inventory costs, and labor market stresses weighed on results. Second, some shaky economic data paired with persistently high inflation was enough last week for investors to question how much longer consumers can reliably spend at recently elevated levels. Higher gas and food prices are beginning to do serious damage to consumer budgets and the issue will likely bleed over into other, more discretionary areas of consumer spending as a result.

Still, Retail Sales numbers for April came out last week and were not as bad as some feared. The +0.9% headline was slightly below the +1.0% consensus expectation, but still marked the fourth straight month of growth for retailers. Retail Sales without vehicle sales (which tend to skew the headline numbers), looked solid – coming in at +0.6% versus the +0.4% expected. To further bolster the case that consumers aren’t quite in dire straits yet, the advance of the first-quarter Gross Domestic Product (GDP) report, while negative, saw a nicely positive contribution from consumers that was offset by inventory and government spending issues. This was a positive development in an otherwise disappointing datapoint. The U.S. economy is very consumer-driven and as long as consumer spending can hold up, a recession shouldn’t be imminent.

On corporate earnings – while the headlines around many major consumer-focused earnings reports were disappointing, the underlying results weren’t quite that bad. Large retailers are indeed dealing with inventory issues and rising labor costs – both of which will weigh on margins – but overall revenues and same-store sales results have generally been positive, which is a more nuanced story than what many would assume based on stock returns over the last several weeks. In fact, the first-quarter earnings season has nearly concluded and through the beginning of last week, the consensus is that earnings grew more than 9% year-over-year in the first quarter versus the initial forecast of 4.9% growth. Ten out of 11 sectors have seen increases in estimates with Consumer Discretionary being the lone laggard. Similarly, revenue growth and margin expectations have improved as well, signs that corporations are still doing relatively well all things considered.

Investors continued to deal with heightened day-to-day volatility last week as rising interest rates and wavering global economic conditions dealt another blow to markets. Stocks ended mostly lower on Monday as the final hour of trading saw heavy selling. A report from China showing that strict Covid lockdowns in the country have severely affected economic activity contributed to the intraday weakness. Tuesday saw a recovery driven by a rally in growth stocks, the previously mentioned Retail Sales report, and better-than-expected Industrial Production figures. Earnings from large retailers were released on Wednesday and that’s when things really went south. Wednesday saw the worst single-day loss in the DJIA (-3.6%) and SPX (-4.0%) in nearly two years and COMP (-4.7%) would have joined, if not for a particularly bad day earlier this month. Thursday saw more volatility as investors continued to worry about a potential recession and stocks were mixed throughout the day before declining into the close. As you may expect, Friday was no different than the preceding days with respect to volatility. However, stocks managed to end the day mostly flat, which was a welcome change following the damage done on the prior two days. The S&P finished the week nearly 19% off the high it set at the beginning of this year.

Janet Yellen and Ben Bernanke (both former chairs of the Federal Reserve; Yellen is the current U.S. Treasury Secretary) both made headlines last week by warning that the U.S. and global economies may be headed for stagflation. Stagflation occurs when an economy experiences both weak economic growth and high inflation. Obviously strong growth and low inflation is ideal. Even strong growth and high inflation, or weak growth and low inflation aren’t terrible. However, stagflation is dreaded because it is hard to combat, and its impact tends to linger. How did we end up in such a difficult situation? The simple answer is excess money growth in response to the pandemic. The supply of money in the U.S. economy has grown approximately 40% during the pandemic and that growth has been the root cause of the inflation and now potential stagflation issues we face. The Federal Reserve and Congress are about to learn that while money growth really is something, nothing’s free.

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 5/23/2022 Federal Reserve Speakers
Tuesday 5/24/2022 New Home Sales (SAAR) 763,000 750,000
U.S. Manufacturing PMI 59.2 58.0
U.S. Services PMI 55.6 55.4
Wednesday 5/25/2022 Federal Open Market Committee Minutes Released
Durable Goods Orders (April) 0.8% 0.6%
Thursday 5/26/2022 Initial Jobless Claims 218,000 222,000
Continuing Jobless Claims 1.32M
Real Gross Domestic Product (GDP) revision (SAAR) -1.4% -1.3%
Friday 5/27/2022 PCE Inflation (y/y) 6.6%
Core PCE Inflation (y/y) 5.2% 4.9%
Real Consumer Spending 0.2%


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