The Ups and Downs of Summer
Telemus Weekly Market Review June 20th - June 24th, 2022
For many, summertime fun includes a trip to the amusement park. The rollercoaster, a ride I found more enjoyable in my youth than in adulthood, is often used as a visual depiction of the market. While this is an apt analogy of the last few years, it’s also a suitable reference to the ebb and flow of investor sentiment. Going into this week investors had just endured a week where the S&P 500 fell -5.8%. However, this week sentiment changed on a dime with the index gaining +6.5%, with little to no notable new information on the economy or corporate conditions to explain the abrupt shift in attitude.
Market movements this week were characterized by reversals away from inflation friendly trades, which have been in favor much of the year. Of note, the energy sector was the worst performing within the S&P 500, falling by -1.6%. Since peaking on June 8th, the energy sector has swiftly lost over 20%. In addition to energy stocks, the Bloomberg Commodity index dropped by -4.3%. Value stocks lagged their growth counterparts by nearly five percentage points. A quick reversal in these assets, which wasn’t based on changing economic conditions, is a sign of short covering. Effectively those sectors and securities that hedge fund investors were betting against by selling short saw some relief as shorts in these assets (i.e., consumer discretionary stocks, China equities, cryptocurrency) were covered.
While the week’s gain of +6.5% was a welcomed outcome, we view it as a relief rally. The prior week we had seen outsized selling pressure as investors reacted to last week’s fed rate increase. More time to process last week’s action, and additional commentary out of Fed Chairman Jerome Powell’s testimony before congress, resulted in a sharp price reversal and moderation in expectations.
There remains a tug-o-war in the market as the debate between inflation and higher interest rates is being balanced against increased worries that a recession may be on the horizon. These varying views are moving bond markets in a volatile manner. As bond yields shift, stocks also adjust. Lower rates make equities more compelling. Higher rates narrow the expected return difference between stocks and bonds, which then leads to a selloff in equities. Some moderation in the level of volatility should be on the horizon over the near-term, but late July will usher in another Federal Reserve rate hike along with much anticipated second quarter corporate earnings where sales and margin pressures are going to be in focus.
The economy is clearly showing signs of softening. This is what we’d expect as the Federal Reserve tightens rates. The Fed’s goal is to temper demand, which will ease price pressures. This past week we saw economic readings that showed much softer economic conditions. Of note was Friday’s release of the University of Michigan’s Index of Consumer Sentiment, which at a reading of 50.0 was the lowest reading on record. The poor sentiment registered across income, age, political affiliation, and geography. In fact, the United Kingdom also reported consumer confidence at the lowest level on record. In addition, readings around manufacturing activity, globally, show the rate of growth softening with declining order and backlog trends.
We are in a fast-moving economy. Producer prices have been rising faster than consumer prices, and thus companies are slowly reacting to input cost increases by raising prices, but on a delay. This is gradually impacting consumer spending patterns and more recently we’ve seen it impact sentiment. The rate of inflation is likely to remain on an uptrend for several months longer and economic conditions will continue to soften. Eventually we will hit a point of equilibrium where supply and demand find a balance, inflation becomes more subdue, and ultimately rising rate pressures will start to ease. Between now and then, volatility is likely to remain. In this environment, its important to not overreact to quick shifts lower in sentiment, like we had two weeks ago. Alternatively, episodes like this past week, where markets recover without any notable improvement in economic conditions, are not ones to chase. We do see belief asset prices are more balanced and remain optimistic around the prospect for long-term returns for stocks and bonds. In the near-term, however, volatility is likely to continue to ebb and flow with quick shifts in consumer and investor sentiment.
All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Telemus Capital cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance. Current and future portfolio holdings are subject to risk. Risks may include interest-rate risk, market risk, inflation risk, deflation risk, currency risk, reinvestment risk, business risk, liquidity risk, financial risk, and cybersecurity risk. These risks are more fully described in Telemus Capital's Firm Brochure (Part 2A of Form ADV), which is available upon request. Telemus Capital does not guarantee the results of any investments. Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, and may lose value.
An index is not a security in which an investment can be made, as they are unmanaged vehicles that serve as market indicators only and do not account for the deduction of management fees and/or transaction costs generally associated with investable products. The S&P 500 index includes 500 leading companies in the US and is widely regarded as the best single gauge of large-cap US equities. The Michigan Consumer Sentiment Index (MCSI) is a monthly survey of consumer confidence levels in the United States conducted by the University of Michigan. The survey is based on telephone interviews that gather information on consumer expectations for the economy. The Bloomberg Commodity Index (BCOM) is calculated on an excess return basis and reflects commodity futures price movements.
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Matt joined the Telemus team in 2018. As Chief Investment Officer, he leads the firms the investment process and research effort. Matt has experience as an equity analyst and portfolio manager and has advised corporate pension plans on their manager selection. He’s been quoted in Money Magazine and Barron’s.