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Weekly Update 5/20/2022: Earnings Season Winds Down

  • Walmart lowers guidance
  • Retail sales overall remain solid
  • Housing still expensive
  • Boeing receives more MAX orders

Powell Speaks

At The Wall Street Journal’s Future of Everything Festival, Fed Chairman Jerome Powell gave more detail about Fed rationale concerning the economy and inflation.  “We need to see inflation coming down in a convincing way,” Mr. Powell said. “Until we do, we’ll keep going.”  That was further proof that the hawkish path the Fed has embarked on since the beginning of the year would continue.  He added: “There could be some pain involved in restoring price stability,” Of course, that’s what everyone is worried about.  How much will it hurt?  With unemployment at 3.6%, only 0.1% above a 50-year low, Powell said the economy could withstand this measure moving up “a few ticks.”  (That is well and good until it is your job loss which represents these “ticks.”)  Overall with the economy strong, it can withstand less accommodative policy though he stopped short of saying how far they will go or if he sees a recession on the horizon.  He admitted that the Fed erred last year in seeing inflation numbers move lower during the summer and job growth record a few lulls and extrapolating that to believe that continuing to pump liquidity into the markets was the right thing to do.  In hindsight, it was the wrong thing to do and accommodative policy should have been halted much sooner than it was.  At this point, that is water under the bridge and the focus is on getting prices under control.  With the U.S. 2-year Treasury note yielding 2.59%, it is approaching the terminal rate of 3% many expect the Fed to target for their benchmark rate which would suggest that the bulk of the policy pivot has been achieved.  Granted, should supply chain issues not improve or Europe suffers further economic damage due to the situation in Ukraine, we could see the Fed move higher than that level which would increase the risk of deflating aggregate demand.

American Consumer

So far, the average household still has the urge to spend.  Retail sales grew 1% in April, excluding autos and gas stations, according to data from the Commerce Department.  Overall, the pace was 0.9% above March following an upwardly revised 1.4% gain in that month.  Some economists interpreted the data to mean that inflationary pressures have not yet had a material impact on discretionary spending.  Walmart’s quarterly earnings (detailed below) show that cost pressures are affecting companies but not necessarily the desire to spend by its customers.  Consumer spending is the biggest component of GDP so having a healthy environment for buying is crucial.  Nine of the 13 retail categories showed growth last month but some areas have cooled off.  Sales at gasoline stations fell 2.7% after surging 9.6% in March.  Meanwhile, demand for services versus goods is heating up as seen by sales at restaurants up by 2.0% while furniture sales were only up 0.7%.

   

Housing

The National Association of Home Builders/Wells Fargo index fell eight points this month to 69, the steepest tumble since April 2020 when the pandemic was raging in the U.S.  The index has declined for five consecutive months.  The poll is based on sentiment so there are not any revised figures and takes measure of how homebuilders are currently feeling.  Higher materials costs, labor shortages and a rise in rates that is hitting demand are all contributing to a pessimistic mood.  Expectations for the next six months also slumped with that gauge falling 10 points.  Housing starts, decreased 0.2% last month to a 1.7 million annualized rate according to the Commerce Department.  Building permits, a proxy for future construction, fell 3.2%.

Existing home sales fell 2.4% in April to the lowest level since June 2020.  With the average 30-year loan rate rising to 5.30%, up from 2.94% a year prior and 3.50% at the start of the year, according to Freddie Mac data, borrowing costs are becoming a stiff headwind for prospective buyers to overcome.  The National Association of Realtors said sales of previously owned U.S. homes fell to an annualized 5.61 million in April versus the median forecast in a Bloomberg survey of economists of 5.64 million.  The number of homes for sale rose from March but was down 10.4% from year-ago levels.  At the current pace, it would take 2.2 months to sell all the homes available, up from 1.9 in the prior month.  According to realtors, any figure below five months of supply is considered a tight or sellers’ market as evidenced by the fact that homes are on the market for an average of only 17 days, if they make it to the market at all, compared to over a month prior to the onset of the pandemic.  That inventory squeeze has pushed the median price up 14.8% from a year earlier to a record $391,200.  First time buyers and those looking for cheaper homes have been hurt the most by the sticker shock with little relief in sight.

Markets

The major averages continued their volatile swings this week with Tuesday’s 2% gain in the S&P followed by Wednesday’s 4% drop.  Each day this week has been punctuated by swings from positive to negative and vice versa.  We are close to bear market territory for the S&P 500, defined as a decline of 20% or more from the latest high which was reached back on January 4.  Since 1956, there have been 10 such events.  The worse was the 56.8% decline in the S&P 500 from 10/9/07-3/3/09 which coincided with the Great Financial Crisis.  Those 517 days between peak to trough were only half as long as the 929 days that covered 3/24/00-10/9/02 in response to the bursting of the dot-com bubble and its associated sock puppets.  On average, these bear markets have lasted 391 days and had a mean 35.6% decline.  With today being May 20, we are 136 days past the bull market peak.  Perhaps investors were spoiled by the 33.9% decline in 33 days related to the onset of the pandemic in the U.S. which was over in about a month’s time.  Sometimes things do not happen as quickly as desired—as the saying goes, experience is what you get when you don’t get what you want.  An investor could have invested at what was then the all-time high of 3386 on 2/19/20, been discombobulated like the rest of the world as the market nosedived into a tailspin, masked up (or not) for most of the next two years and still be ahead by over 15%, not including any dividends pocketed in that time period.  Given that this nation just marked the millionth death from Covid-19, not bad all things considered.  The point is not to belittle the pain investors have had to endure since the start of 2022, but to emphasize that bear markets like bull markets and all the market in-between are part of the risk and reward of being shareholders.  Working with our planning team, clients understand that liquidity is important to cover essentials, taxes and the occasional emergency, which is why having some cash is always vitally important.  That is in contrast to going to cash to try to time the bottom and avoid more declines which is next to impossible to do because no one has a crystal ball.  We are all aware of how inflation is serving as a tax on spending power so it is no surprise when we counsel that there is no way to build wealth over time by merely staying in cash (remember headline inflation is over 8% and no checking account is going to earn that!) especially since that involves a high percent chance that one misses those “reversal pops” which comprise the bulk of bull market gains.  No one rings the all clear bell when things are ready to boom so being patient and being selective is paramount during volatile times.

Disclaimer

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