2022 remains a challenging year for the markets. After a rough April, the S&P 500 was positive in May though. Yes, it was up just 0.01%, and it took a big weekly rally to get there, but we’ll count it as a win nonetheless. The market narratives have remained the same; inflation, the war in Ukraine and the Fed tightening.
Let’s take a look at some of the recent economic highlights:
- The National Association for Business Economics reported a lower projection for GDP. The median forecast for inflation-adjusted gross domestic product (real GDP) for the fourth quarter (Q4) of 2022 is an increase of 1.8% from Q4 2021, compared to a median forecast of 2.9% in the February 2022 survey.
- The Bureau of Labor Statistics released the May non-farm payrolls on June 3rd. The economy beat expectations and created 390,000 jobs.
- A key manufacturing sector index is still positive. The Institute for Supply Management Purchasing Managers' Index for May was 56.1. Any number above 50 indicates expansion, while numbers below 50 show shrinkage.
- And consumers are still confident. The Conference Board said on May 31st that its consumer confidence index dipped to 106.4 in May, from 108.6 in April. This is still a strong reading and likely indicates consumers will keep spending.
With the markets, it’s often a matter of “better or worse” rather than “good or bad.” A growing economy, strong job creation, an expanding manufacturing segment, and a confident consumer classifies as good. That said, the growth has clearly slowed, and that growth is worse than before. Combining “worse” with inflation and the war and worries about a recession and near-bear market conditions become louder.
Will inflation ever slow down?
May’s inflation report comes out on June 10th and it will have everyone’s attention. Think back to your economics class in high school. Remember the trusty supply and demand chart? Consumer demand has been high due to pent-up demand and easy money. Supply has been short in areas due to the pandemic aftershocks and the war in Ukraine. High demand and low supply equate to higher prices.
The Fed has started to make money less easy by raising interest rates. High prices also cause consumers to shift their behavior, consuming less, leading demand to decrease. At the same time, high prices lead producers to produce more to take advantage of the profit potential, increasing supply. Back to the trusty supply and demand chart, when supply increases and demand decreases, prices fall. That’s the theory at least, but how long it takes to play out is yet to be seen.
Oil prices are up 73% from a year ago. The spread between a gallon of oil and a gallon of gas was at the highest ever on record in May, reflecting low inventories and refinery capacity. The war in Ukraine, a global avian flu, and labor shortages are also having big impacts on food prices.
The expectation is that in Friday’s inflation report we will see inflation moderating slightly for the second straight month. Some members of the Fed have indicated recently that they may find it appropriate to pause interest rate hikes in September of this year. The market is keenly looking for signs that may happen, though the volatility we’ve experienced over the last few months is representative of the uncertainty.
Through June 7th,
- The S&P 500 is down 12.12% year to date
- International Indexes (MSCI EAFE) are down 11.65% year to date
- Bond index (Barclays Aggregate Bond) is down 9.58% YTD
The Smart Investor
We can’t tell you when the bottom for the markets is in. We can’t tell you how long it will take to recover the losses experienced so far. We can tell you though that every bear market in history has recovered, and there’s no reason to believe this will not as well.
We know it is tough at times to stay the course, but that is exactly what we still advise. Rebalance the portfolio, evaluate your risk levels and investment choices, but stay disciplined towards your long-term plan. Remember, most of us as investors are in this for the long-haul. Shoot us a message to firstname.lastname@example.org if you have any questions or want to chat.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities that represent the stock market in general. The Bloomberg Barclays US Aggregate Bond Index is a broad base, market capitalization-weighted bond market index representing intermediate-term investment-grade bonds traded in the United States and is used for measuring the performance of the US bond market. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. It is maintained by MSCI Inc., a provider of investment decision support tools; the EAFE acronym stands for Europe, Australasia and Far East.
This material is provided as a courtesy and for educational purposes only. Investing involves risk including loss of principal. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. This article contains links to articles or other information that may be contained on a third-party website. River City Wealth Management is not responsible for and does not control, adopt, or endorse any content contained on any third-party website. The information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. Past performance is not indicative of future results.