June 2022 Market + Economic Update

MAY RECAP

Welcome to June!

What a relief to have May in the rearview mirror after a volatile month (in both the markets and the headlines). Surprisingly, despite weeks of negative performance, the major stock indexes actually finished flat, thanks to an end-of-month rally. Not surprisingly, May’s bumpy ride left many investors feeling buffeted from all sides, due to several contributing factors:

Higher interest rates. The Federal Reserve (the ‘Fed’) increased rates half a percentage point to kick off the month, the largest rate increase since 2000. Fed Chairman Jerome Powell confirmed that economic conditions remain uncertain, and additional rate hikes are expected over the next few months, as the Fed works to combat inflation.

Tech stock selloff. Traders and investors alike have lightened up on their tech stock exposure, with mega-cap names like Apple, Google, Amazon, and Facebook all down double digits year-to-date. There is speculation that higher interest rates may be problematic for tech companies due to potentially higher borrowing costs.

Disappointing retail earnings. Supply chain issues and higher costs due to inflation dragged down earnings for major retailers like Target and Walmart. Some retailers reported a drop in the number of transactions, suggesting that shoppers are limiting purchases to more essential items. Smaller retailers reported more encouraging figures, a positive sign for the health of the US consumer.

While we don’t know when things will settle down, we remain confident that a diversified, disciplined, long-term financial approach can weather the storm. We’re grateful to be part of your financial team. If there’s anything you need, please schedule some time with our office.

MARKET COMMENTARY

Stocks

A higher-than-expected inflation report triggered a sell-off on Friday, leaving stocks in the red for the week.

The Dow Jones Industrial Average lost 4.58%, while the Standard & Poor’s 500 dropped 5.05%. The Nasdaq Composite index slid 5.60% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, declined 1.81%. 1,2,3

Inflation Upends Stocks

Stocks gyrated between gains and losses last week until sliding lower on Friday’s hot inflation report, which heightened worries over a more aggressive Fed and a further economic slowdown. Stocks moved higher to begin the week, despite rising bond yields, a profit warning from a major retailer, and Senate testimony by Secretary of Treasury Janey Yellen, who said that inflation was likely to remain elevated.

Stocks turned lower later in the week on renewed concerns of an economic slowdown, sparked by a downward revision in The Federal Reserve–Atlanta’s real-time estimate of second-quarter GDP growth and a drop in new mortgage applications. Investors lightening up on stocks ahead of Friday’s inflation report may have also contributed to Thursday’s selling.

Inside Inflation

Consumer prices rose 8.6% year-over-year in May, marking the highest rate since December 1981. Price increases over the last 12 months were driven by a 34.6% jump in energy prices and by food costs, which climbed 10.1%. Used car and truck prices, which had seen three straight months of decline rose 1.8% from April, while airfares soared 12.6% in May.4

May’s inflation exceeded economists’ forecasts and dashed hopes that inflation had plateaued. In a separate economic report on Friday, real wages (net of inflation) fell 0.6% in April and were lower by 3% from 12 months ago.5

Sector Performance

Energy stocks continue to significantly outpace the rest of the market, adding another 15.77% in May, with the year-to-date total up more than 58%. Utilities notched another positive month as investors and traders alike rotate towards less volatile sectors. The Tech and Communications sector both treaded water in May while Consumer Discretionary fell nearly 5%. The Consumer Discretionary sector contains stocks like Amazon, Tesla, and Nike, all of which are down nearly -30% year-to-date.

Bonds

Corporate bonds were a rare bright spot in May, posting a positive return for the first time this year. Despite the good news, bonds continue to face headwinds as the Fed pursues an aggressive interest rate policy to combat inflation.

ECONOMIC UPDATE

US economy remains strong. May offered a good example of the fact that the stock market is not the same as the economy, as the US economy continues to show signs of strength in key areas:

  • The unemployment rate held at 3.6%, while a more encompassing jobless rate edged higher to 7.1%.
  • US employers added 390,000 jobs in May, outpacing projections.

News | June 13, 2022 | WMBC

Footnotes and Sources

1. The Wall Street Journal, June 10, 2022

2. The Wall Street Journal, June 10, 2022

3. The Wall Street Journal, June 10, 2022

4. CNBC, June 10, 2022

5. CNBC, June 10, 2022

Index Definitions

Dow Jones Industrial Average: The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.

Dow Jones U.S. Real Estate Total Return Index: The index is designed to track the performance of real estate investment trusts (REIT) and other companies that invest directly or indirectly in real estate through development, management, or ownership, including property agencies.

NASDAQ Composite: The NASDAQ Composite is a market-cap weighted index of all issues listed on the Nasdaq stock exchange. It is heavily weighted towards the technology sector.

S&P 500 Bond Index: The S&P 500® Bond Index is designed to be a corporate- bond counterpart to the S&P 500, which is widely regarded as the best single gauge of large-cap U.S. equities. Market value-weighted, the index seeks to measure the performance of U.S. corporate debt issued by constituents in the iconic S&P 500.

S&P 500 Consumer Discretionary: The S&P 500® Consumer Discretionary comprises those companies included in the S&P 500 that are classified as members of the GICS® consumer discretionary sector.

S&P 500 Consumer Staples: The S&P 500® Consumer Staples comprises those companies included in the S&P 500 that are classified as members of the GICS® consumer staples sector.

S&P 500 Energy: The S&P 500® Energy comprises those companies included in the S&P 500 that are classified as members of the GICS® energy sector.

S&P 500 Financials: The S&P 500® Financials comprises those companies included in the S&P 500 that are classified as members of the GICS® financials sector.

S&P 500 Index: The S&P 500® index is a market-cap weighted index of the largest 500 companies headquartered in the United States. The index covers approximately 80% of available market capitalization.

S&P 500 Utilities: The S&P 500® Utilities comprises those companies included in the S&P 500 that are classified as members of the GICS® utilities sector.

S&P U.S. Aggregate Bond Index: The S&P U.S. Aggregate Bond Index is designed to measure the performance of publicly issued U.S. dollar denominated investment- grade debt. The index is part of the S&P AggregateTM Bond Index family and includes U.S. treasuries, quasi-governments, corporates, taxable municipal bonds, foreign agency, supranational, federal agency, and non-U.S. debentures, covered bonds, and residential mortgage pass-throughs.

S&P U.S. Treasury Bond Index: The S&P U.S. Treasury Bond Index is a broad, comprehensive, market-value weighted index that seeks to measure the performance of the U.S. Treasury Bond market.

Economic Definitions

Consumer Prices – CPI: Consumer prices (CPI) are a measure of prices paid by consumers for a market basket of consumer goods and services. The yearly (or monthly) growth rates represent the inflation rate.

PCE (headline and core): PCE deflators (or personal consumption expenditure deflators) track overall price changes for goods and services purchased by consumers. Deflators are calculated by dividing the appropriate nominal series by the corresponding real series and multiplying by 100.

Disclosures

PLEASE NOTE: When you link to any of the websites displayed within this email, you are leaving this email and assume total responsibility and risk for your use of the website you are linking to. We make no representation as to the completeness or accuracy of any information provided at these websites.

A portion of this material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.

Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. Past performance cannot guarantee future results.

Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect again loss. In general, the bond market is volatile; bond prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed-income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Vehicles that invest in lower-rated debt securities (commonly referred to as junk bonds or high-yield bonds) involve additional risks because of the lower credit quality of the securities in the portfolio. International investing involves special risks not present with U.S. investments due to factors such as increased volatility, currency fluctuation, and differences in auditing and other financial standards. These risks can be accentuated in emerging markets.

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Certain information may be based on information received from sources the Advisor Group Research Team considers reliable; however, the accuracy and completeness of such information cannot be guaranteed. Certain statements contained herein may constitute “projections,” “forecasts” and other “forward-looking statements” which do not reflect actual results and are based primarily upon applying retroactively a hypothetical set of assumptions to certain historical financial information. Any opinions, projections, forecasts and forward-looking statements presented herein reflect the judgment of the Advisor Group Research Team only as of the date of this document and are subject to change without notice. Advisor Group has no obligation to provide updates or changes to these opinions, projections, forecasts and forward- looking statements. Advisor Group is not soliciting or recommending any action based on any information in this document.

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