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Cooler-than-expected Inflation Sends Markets Higher

Market Data as of Week Ending: 08/12/2022 unless noted otherwise

Equities

U.S. stock prices moved higher for the fourth straight week, the longest string of weekly gains since November 2021, as investors welcomed the idea that consumer prices may have peaked. In a reversal from previous weeks, value stocks outperformed their growth counterparts while small and mid-sized companies continued their outperformance versus their large company peers. All eleven of the major economic sectors advanced for the week, led by energy, financials, and materials. Traditionally, defensive sectors such as consumer staples and health care lagged. Developed foreign and emerging stock prices moved higher but lagged the U.S. for the week.

Bonds

U.S. Treasury yields ended the week relatively unchanged with the 10-year U.S. Treasury remaining at 2.83% as it appears the treasury market remains skeptical of a softening to monetary policy. Lower quality bonds outperformed for the fourth week in a row and were led by outperformance from long duration high yield bonds. Government and corporate bonds generally advanced across the duration spectrum, while long duration government was the only segment that failed to post a gain. Yields on investment grade and high yield corporate bonds declined, finishing the week at 4.4% and 7.5%, respectively.

Macroeconomic Data

Economic releases were generally positive for the week as Wednesday’s cooler-than-expected CPI reading dominated headlines. The NFIB small-business index rose to 89.9 in July from 89.5, reflecting improved expectations among small-business owners. U.S. productivity fell at a -4.6% annual rate in the second quarter, marking the second consecutive quarterly decline as labor costs are rising sharply. The U.S. consumer price index was unchanged in July, keeping the 12-month inflation rate at 8.5% as the decline in used car prices and goods was able to offset the rise in cost of shelter and wages. The U.S. producer price index fell 0.5% in July, marking the first downshift since 2020 as energy prices fell 9%. The University of Michigan’s preliminary consumer sentiment reading showed improvement as the index rose to 55.1 from 51.1 in July. The BoE expects a recession to begin at the end of the year as the U.K.’s GDP contracted by 0.1% in the second quarter.

 

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Markets End the Week Mixed on Surprising U.S. Jobs Report

Market Data as of Week Ending: 08/05/2022 unless noted otherwise

Equities

U.S. stock prices finished the week mixed as investors weighed U.S.-China relations, earnings and a much stronger-than-expected jobs report. The higher-than-expected job growth revived investors’ concerns that the Federal Reserve will need to maintain aggressive monetary tightening in response to the data. Growth stocks continued their outperformance versus their value counterparts while small and mid-sized companies generally outperformed their large company peers. The major economic sectors produced mixed results for the week with information technology, consumer discretionary and communication services sectors leading the way. Energy and traditionally cyclical sectors such as real estate and materials lagged. Developed foreign stock prices moved lower and underperformed the U.S., while emerging markets outperformed both.

Bonds

U.S. Treasury yields moved higher last week as positive economic data eased recession fears. The 10-year U.S. Treasury increased to 2.83% on the back of the stronger-than-expected jobs report while the 2-year yield jumped to 3.23%. Lower quality bonds outperformed for the third week in a row and were led by outperformance from long duration high yield bonds. Government and corporate bonds failed to post a gain across the duration spectrum. Yields on investment grade rose while high yield corporate bonds declined, finishing the week at 4.5% and 7.7%, respectively.

Macroeconomic Data

Economic releases were generally positive as the “good news is bad news” dynamic remained intact. The ISM manufacturing index fell to 52.8%, marking a 25-month low but showed that inflation pressures eased and was above expectations. Americans added $312 billion in debt in the second quarter, with $46 billion of that on their credit cards, marking the sharpest increase in more than 20 years. The ISM services index rose to 56.7% from 55.3% in July, suggesting the economy continues to expand despite growing headwinds. The U.S. added a surprising 528,000 new jobs in July sending the unemployment rate to a pre-pandemic low of 3.5% as the labor market continues to be a beacon of light. The BoE raised its key interest rate by 0.50% to 1.75%, the biggest increase in 27 years.

 

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Stocks Shrug Off Downbeat GDP to Close Out Best Month Since 2020

Market Data as of Week Ending: 07/29/2022 unless noted otherwise

Equities

U.S. stock prices moved higher last week as markets shrugged off a downbeat GDP report in hopes that economic contraction may slow the Fed’s aggressive hiking cycle. U.S. earnings have proved resilient, with the majority of companies in the S&P 500 beating estimates to start second quarter earnings season. Value stocks lagged their growth counterparts while small and mid-sized companies generally outperformed their large company peers. All the major economic sectors produced gains for the week and were led by strength in the energy, utilities, industrials, and consumer discretionary sectors. Traditionally defensive sectors such as consumer staples and health care lagged. Developed foreign stock prices delivered solid gains and outperformed the U.S, while emerging markets trailed.

Bonds

U.S. Treasury yields declined as expectations for aggressive central bank policies softened. The 10-year U.S. Treasury fell to 2.65% and the 2-year yield ended the week at 2.89% on the back of the Fed’s rate hike and negative U.S. GDP growth. Lower quality bonds outperformed for the second week in a row and were led by outperformance from long duration high yield bonds. Long duration government bonds were the only ones that failed to post a gain. Yields on investment grade and high yield corporate bonds declined and finished the week at 4.3% and 7.8%, respectively.

Macroeconomic Data

Economic releases were generally worse than expected, creating a “bad news is good news” dynamic. U.S. consumer confidence declined for the third straight month in July, dropping to 95.7 as inflation continues to impact the consumer. U.S. pending home sales fell 8.6% in June, significantly worse than estimates, as higher mortgage rates and dampened sentiment likely have potential homebuyers on the sidelines. The U.S. economy shrank by 0.9% in the second quarter, marking the second quarterly decline in a row. The back-to-back declines in GDP were the first since the 2007-2009 Great Recession. The U.S. PCE rose 1% in June, led by higher fuel prices, as inflation remains higher than expectations. University of Michigan’s Consumer Sentiment Index was revised higher, unexpectantly, to 51.5, from 51.1, but still remains at historically low levels.

 

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Stock Prices Recover as Investors Focus on Growth

Market Data as of Week Ending: 07/22/2022 unless noted otherwise

Equities

U.S. stock prices gained as companies in the S&P 500 have generally reported better than expected results for the second quarter. Sentiment has shifted back toward investors embracing risk assets, with an emphasis on growth stocks, as the economy starts to show signs of slower growth. Value stocks lagged their growth counterparts while mid-sized companies generally outperformed their small and large company peers. Most of the major economic sectors produced gains for the week and were led by strength in the consumer discretionary, materials, industrials, and information technology sectors. Traditionally defensive sectors such as utilities, health care, and consumer staples lagged. Developed foreign and emerging market stock prices also delivered solid gains and outperformed the U.S.

Bonds

U.S. Treasury yields declined as the 10-year U.S. Treasury fell to 2.75% and the 2-year yield ended the week at 2.97%. When short-term yields are higher than longer-term yields, it’s typically associated with slower growth and higher recession risks. Lower quality bonds outperformed and were led by outperformance from long duration high yield bonds. Government bonds lagged but still delivered gains across the yield curve. Yields on investment grade and high yield corporate bonds declined and finished the week at 4.4% and 8.1%, respectively.

Macroeconomic Data

Economic releases were generally worse than expected and are indicating that the economic growth is slowing, increasing the risk of recession. The July reading of the S&P Global Flash US Composite PMI came in at 47.5 and contracted (below 50) for the first time in nearly two years as both manufacturers and service providers reported softer demand. Initial jobless claims rose to 251,000, a new high for the year, and continuing claims rose to 1.4 million. Housing starts declined 2% in June and prices remain elevated as the median price of existing homes increased more than 13% over the previous 12 months. In Europe, the ECB lifted policy rates for the first time since 2011 to address inflation in the region. In the United Kingdom, which officially left the EU in 2020, inflation climbed to a new four-decade high of 9.4%.

 

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Inflation Increases to Highest Level in More Than 40 Years

Market Data as of Week Ending: 07/15/2022 unless noted otherwise

Equities

U.S. stock prices declined as inflation rose to 9.1%, the highest annual increase in more than 40 years. Typically, investors are already focused on quarterly financial results; however, this week’s sentiment was more centered on inflation and its influence on the upcoming Fed policy meeting. Value stocks narrowly outperformed their growth counterparts while small-sized companies generally lagged their mid and large company peers. Consumer staples was the only major economic sector with a gain, followed by relative outperformance in other traditionally defensive sectors, health care and utilities. Crude oil prices declined to less than $100 per barrel and energy stocks were among the worst performers along with the communication services, industrials and materials sectors. Developed foreign and emerging market stock prices also declined and underperformed relative to the U.S.

Bonds

Longer term U.S. Treasury yields declined as the 10-year U.S. Treasury fell to 2.92%. However, the 2-year yield was slightly higher ending the week at 3.13%. When short-term yields are higher than longer-term yields, it’s typically associated with slower growth and higher recession risks. Higher quality bonds outperformed and were led by outperformance from long duration government bonds. High yield corporate bonds lagged but still delivered gains across the yield curve. Yields on investment grade and high yield corporate bonds were little changed, finishing the week at 4.6% and 8.6%, respectively.

Macroeconomic Data

Economic releases were headlined by the monthly inflation readings that come from the Consumer Price Index (CPI). The June report showed a monthly increase of 1.3%, which was 9.1% higher than the same period 12 months ago. Even after excluding the more volatile food and energy prices, the monthly Core reading was 0.7% and gained 5.9% over the past year. Retail sales were better than anticipated and advanced 1.0% in June and 8.4% compared to the same period one year ago; however, those figures are not adjusted for inflation. Consumer sentiment beat expectations and rose from a record low of 50.0 in June to 51.1 in July. In Europe, the euro and the U.S. dollar were both priced at 1 for the first time in two decades as the European central bank still has not lifted policy rates to address inflation in the region.

 

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U.S. Stock Prices Rise as Sentiment Improves

Market Data as of Week Ending: 07/08/2022 unless noted otherwise

Equities

U.S. stock prices advanced as signs start to emerge that the economy may be able to withstand an imminent recession. Investors will soon focus on quarterly financial results, but this week’s sentiment was more focused on the Fed. Minutes from the June meeting were released and recent comments from Fed voting members were optimistic about reducing inflation without forcing the economy into a recession. Growth stocks rotated back into favor and outperformed their value counterparts while small-sized companies generally outperformed their mid and large company peers. Consumer discretionary, information technology, and communication services sectors outperformed with solid gains. However, nearly half the major economic sectors recorded losses for the week led by declines in the energy, utilities, and materials sectors. Developed foreign and emerging market stock prices also recorded gains for the week, but underperformed relative to the U.S.

Bonds

U.S. Treasury yields rose after three consecutive weeks of declines. The 10-year U.S. Treasury rose to 3.08% and the 2-year yield was slightly higher at 3.11%. Rising yields are generally viewed as positive for the economy; however, when short-term yields are higher than longer-term yields, it’s typically associated with slower growth and higher recession risks. High yield corporate bonds outperformed and were the only major bond segment to record gains for the week. Higher quality and longer duration bonds lagged as investors were willing to accept more credit risk. Yields on investment grade corporate bonds narrowly rose while high yield corporate bonds declined, finishing the week at 4.7% and 8.6%, respectively.

Macroeconomic Data

Given the lack of volume from an economic data perspective, investors were focused on the two monthly job reports from the Labor Department and comments from the Federal Reserve. Job openings declined from 11.7 million to 11.3 million and there were 372,000 jobs added in the month of June. The unemployment level remains steady at 3.6% and nearly all the jobs lost from the pandemic have been recovered. Investors expect the Fed to announce another rate hike of 0.75% at their meeting later this month as Fed policy makers have foreshadowed their views through public comments. In Europe, Boris Johnson announced his intention to resign amidst a series of scandals. Meanwhile, in Asia the assassination of Shinzo Abe, Japan’s former prime minister, shocked the world.

 

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Stocks Decline as Recession Threats Loom

Market Data as of Week Ending: 07/01/2022 unless noted otherwise

Equities

U.S. stock prices could not maintain positive momentum as major indices rotated back toward losses for the week. A fresh wave of weak economic data was released, and several companies warned that profitability will be challenged as demand is expected to slow. Second quarter earnings growth expectations have declined by nearly 2% over the past three months. Value stocks returned to the forefront and outperformed their growth counterparts while mid-sized companies generally outperformed their small and large company peers. Energy and traditionally more defensive sectors such as utilities, consumer staples, and health care were the only sectors to record gains. Consumer discretionary, information technology, and communication services sectors lagged in these more volatile and higher growth areas. Developed foreign and emerging market stock prices also declined with mixed results, relative to the U.S.

Bonds

U.S. Treasury yields fell for the third consecutive week as investors continue to price in higher probabilities that the U.S. is headed toward a recession. The 10-year U.S. Treasury fell to 2.88%, its lowest level in more than a month. Higher quality and longer duration bonds outperformed as investors showed a strong preference for safety and cash flow visibility. High yield bonds declined and were the worst performing segment across the curve. Yields on investment grade corporate bonds narrowly fell while high yield corporate bonds moved higher, finishing the week at 4.6% and 8.9%, respectively.

Macroeconomic Data

Economic data releases were largely disappointing as they were generally worse than expected. Consumer confidence has been declining and the Conference Board’s index dropped 4.5 points to its lowest level in nearly a decade. That sentiment is starting show in consumption activity as consumer purchases declined 0.4% in May, after adjusting for inflation. This was the first decline of the year and was largely driven by a pullback in purchases of goods. Inflation data from the PCE index showed some signs that inflation may be peaking as core prices (excludes food and energy prices) were up 0.3% in May, the same increase for the fourth consecutive month. In Europe, central bank policy makers contemplated the possibility of raising rates as high as 0.50% as inflation remains a global issue. According to Eurostat, inflation in the region accelerated to another record high of 8.6% in June.

 

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Stocks Snap Three-Week Losing Streak, Regain Footing

Market Data as of Week Ending: 06/24/2022 unless noted otherwise

Equities

U.S. stock prices snapped their three-week losing streak as major indices regained their footing after entering bear market territory. The S&P 500 gained 6.46% on the week as investors brushed aside lingering recession concerns and Fed Chair Powell’s hawkish Congressional testimony matched market expectations. Growth stocks continued their outperformance, outgaining value, and larger companies generally outperformed their small company peers. Nearly every sector in the S&P 500 recorded strong gains with consumer discretionary and health care leading the way. The energy sector was the exception, returning -1.55%, as oil prices fell on weak economic data and demand concerns. Developed foreign and emerging market stocks advanced but lagged the U.S.

Bonds

U.S. Treasury yields fell for the second consecutive week on the back of Fed Chair Powell’s comments and weaker-than-expected economic readings. The 10-year U.S. Treasury fell to 3.14%. Returns were mixed across the quality spectrum as longer duration high yield bonds were the best performing segment. Yields on investment grade corporate bonds and high yield corporate bonds moved slightly lower, finishing the week at 4.7% and 8.4%, respectively.

Macroeconomic Data

Economic data releases were largely disappointing in what was a relatively light week. Existing home sales fell 3.4% to a seasonally adjusted annual rate of 5.41 million in May, marking the fourth straight monthly decline. U.S. businesses suffered a sharp decline in June as high inflation has reduced demand. The S&P U.S. services index declined to a five-month low of 51.6 while the U.S. manufacturing index closed in on a two-year low of 52.4 in June. The final U.S. consumer sentiment index was revised unexpectantly to an all-time low of 50 in June as persistent inflation and record high gas prices have weighed on consumers. The 1-year U.S. inflation forecast was revised lower to 5.3% from 5.4%. U.K. inflation rose to a record 9.1% in May as food costs rose at the fastest rate in 13 years.

 

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Fears of Hard Landing Send S&P 500 into Bear Market Territory

Market Data as of Week Ending: 06/17/2022 unless noted otherwise

Equities

U.S. stock prices continued their downward trajectory as persistent inflation, central bank tightening, and higher yields sent markets lower. The S&P 500 officially entered bear market territory after recording its worst week since March 2020, returning -5.75%. The percentage of S&P 500 companies trading above their 50-day moving average fell below 5% last week, the lowest level since the beginning of the pandemic. In a reversal from last week, growth stocks held up better than value and larger companies generally outperformed their small company peers. All eleven S&P 500 sectors were solidly lower, with most declining between 4 to 6%. The energy sector was the worst performer, returning -17.10%, as oil prices experienced volatility on the back of supply concerns. Developed foreign and emerging market stocks narrowly outperformed the U.S.

Bonds

U.S. Treasury yields had a choppy week, briefly touching multi-year highs before a relief rally sent the 10-year treasury yield down to 3.23%. Higher-quality government bonds outperformed while shorter durations were able to provide value. Yields on investment grade corporate bonds and high yield corporate bonds were sent higher, finishing the week at 4.8% and 8.5%, respectively.

Macroeconomic Data

Economic data releases were relatively sluggish as the Federal Reserve’s rate decision loomed large. The NFIB small-business index was unchanged in May at 93.1 as expectations for future business conditions continued to deteriorate amid persisting inflation. U.S. retail sales fell for the first time in five months, declining 0.3% in May due to fewer auto purchases. The NAHM home builders index declined for the sixth month in a row and to a two year low of 67, reflecting growing pessimism as interest and mortgage rates climb. The Federal Reserve announced a 0.75% rate hike, the largest in three decades, as the Fed continues to be aggressive in combating inflation. The Philadelphia manufacturing index contracted for the first time since May 2020, falling to -3.3 in June from 2.6. The Bank of England raised its key interest rate by 0.25%, the fifth meeting in a row in which the BOE rose rates, as inflation recently reached 9.0% in the U.K.

 

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Markets Move Lower as Investors Grapple with Higher Inflation and Record Low Sentiment

Market Data as of Week Ending: 06/10/2022 unless noted otherwise

Equities

U.S. stock prices recorded another week of solid losses despite some early-week strength as market volatility continued. The S&P 500 returned -5.04% as markets turned south Thursday afternoon and into Friday as investors grappled with a hotter-than-expected inflation reading and upcoming monetary tightening in Europe. Value stocks were able to hold up better than growth and smaller companies generally outperformed their large company peers. The energy sector led the way again, posting only a minor loss on the week as oil prices climbed most of the week. Traditionally defensive sectors, consumer staples and health care, outperformed while financials, information technology, and consumer discretionary lagged. Developed foreign and emerging market stocks outperformed the U.S.

Bonds

U.S. Treasury yields increased as the price of government bonds decreased after Friday’s inflation reading, sending the 10-year treasury yield 0.22% higher to 3.16%. Higher-quality government bonds outperformed while credit sensitive bonds lagged. Among high quality investment grade bonds, those with shorter durations generally outperformed. Yields on investment grade corporate bonds and high yield corporate bonds jumped higher, and finished the week at 4.6% and 7.8%, respectively.

Macroeconomic Data

Economic data releases were sparse this week and were headlined by a hotter-than-expected consumer price index (CPI) reading. Rising rents, gas and food pushed May’s CPI up by 1.0%, bringing the year-over-year inflation rate to 8.6%, the highest reading in 40 years. The U.S. consumer credit rose to $38.1 billion, above consensus estimates and the third straight month of gains in consumer borrowing above $30 billion. U.S. unemployment claims increased by 27,000 to a five-month high of 229,000 during the first week of June, but appears to be linked to Memorial Day hiring. Consumer sentiment fell to a record low of 50.2 in the University of Michigan’s preliminary June reading as rising costs and expected monetary tightening has weighed on consumers. Japan’s government and central bank expressed concern as the sharp decline of the Yen has brought it to its lowest level in two decades versus the U.S. dollar.

 

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