Market Commentary 6/8/22

Markets Show Signs of Stabilization

The S&P 500 was slightly positive during May. While the 0.2% return was a welcome sight after April’s -8.8% performance, the S&P 500 remained volatile with the index down more than 5% at its lowest point. Bonds likewise produced positive total returns in May as Treasury yields stabilized.

Federal Reserve policy and inflation remain a major concern for investors. The Federal Reserve raised its benchmark interest rate 0.5% at May’s meeting and is expected to follow-up with 0.5% increases at both the June and July meetings.

Economic data showed inflation accelerated 8.3% year-over-year during April 2022 and remains near a 40-year high. The Federal Reserve wants to see evidence that inflation pressures are easing, which leaves investors debating how far and fast the central bank will increase interest rates to combat such high inflation. The near-term investment outlook remains particularly uncertain as the market searches for direction.

Retail Results Underscore Inflation’s Impact

Two of the nation’s largest retailers reported underwhelming first-quarter 2022 earnings. Both companies were hurt by not raising prices fast enough in response to increased supply chain costs. Both retailers also saw their inventories grow by 30%, reflecting price increases by their vendors, while also facing softening consumer demand for discretionary purchases, such as home goods and apparel. The earnings reports caused retail stocks to selloff and highlighted three key themes:

  1. Inflation pressures remain strong and are catching companies off-guard.
  2. Inventories increased after retailers restocked at higher prices, and consumers shifted spending. It could take multiple quarters to work through the excess inventories.
  3. Additional price increases may be coming as companies focus on maintaining profit margins.

Consumer Sentiment

The three themes noted above demonstrate inflation’s impact not only on corporate earnings, but on how consumer’s feel about their own outlook and the state of the economy. It should come as no surprise that consumer sentiment, as tracked by the University of Michigan, is down; however, it has reached levels below what was experienced during the height of the pandemic and is approaching lows not seen in nearly 10 years. Negative sentiment does not seem to correlate with a positive return in the markets, but we would like to point out two important historical trends. Markets can rally during Bear markets, and sometime surprisingly so. Additionally, markets are forward looking. The former point is not meant to imply that the markets are ready to rally unimpeded, as we don’t think that is the case. Investors continue to deal with numerous uncertainties in the fiscal, political, economic, and geopolitical arenas. Such uncertainties are unlikely to be resolved in the near term but we will continue to monitor these factors and keep you updated on our thoughts. If you have any questions regarding your portfolio or want to discuss market activity, please do not hesitate to contact us.

Have a good week,

Dennis P. Barba, Jr.
President & Managing Partner

Michael P. Finkelstein, CFA

Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The report herein is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request. CAR-0522-01686

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