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Key Points for the Week
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One of the most challenging times for investors is a market downturn. Whether markets are experiencing a correction or a bear market, it’s really disturbing to watch the value of your savings and investments decline.
Last week, the CNN Business Fear & Greed Index showed extreme fear was the emotion driving investment decisions. The Index “is a way to gauge stock market movements and whether stocks are fairly priced. The theory is based on the logic that excessive fear tends to drive down share prices and too much greed tends to have the opposite effect.”
During times like these, many investors succumb to fear and take actions that damage their ability to reach their financial goals. The fear and greed cycle works like this:
It’s counterintuitive, but many think the time when investors should be greedy is when the market nears a bottom. That’s when it may be possible to find shares with strong fundamentals that are selling at attractive prices. Since no one really knows when a turning point will occur, investors who decide to buy low may experience losses before they realize gains.
Last week, major U.S. stock indices moved lower.
If you’re feeling fearful, let us know. One of our most important roles is helping clients stay focused on financial goals, maintain a disciplined investment approach, and keep a long-term perspective in difficult markets.
The S&P 500 continued its string of negative weeks, dropping 3% last week. It was the seventh straight weekly decline in the index of large-cap stocks. The S&P 500 temporarily fell more than 20% on Friday, but the market rallied and the index finished down 18.1% from its January all-time high.
Poor earnings at big-box retailers caused much of the market decline. Wednesday’s slide of 4% was the result of a second straight day in which a major retailer announced earnings would miss expectations. Companies cited high labor costs, head counts, and shipping prices as reasons for the poor quarterly performance.
One factor which companies didn’t cite was low sales. April retail sales confirmed the trend of improvement, rising 0.9%. Increased auto sales and more money spent on dining out contributed to strong monthly spending. While spending on goods and services is increasing, homebuyers seem to be slowing their purchases. Single-family housing starts fell 7.3% last month, and existing home sales fell 2.4%. Higher mortgage rates are a top reason for the decline.
Industrial production showed similar strength to retail sales, jumping 1.1% in April. Manufacturing climbed 0.8% and reached its highest level since 2008.
The MSCI ACWI dropped as big-box retailers’ poor earnings didn’t hit global stocks as hard as they did U.S. stocks. Bonds helped cushion the decline. The Bloomberg U.S. Aggregate Bond Index rallied. The PCE deflator, which measures inflation, and some key trade data are the top economic releases this week.
Market volatility continued to make things difficult for equity investors. Seven straight weeks of losses in the S&P 500 make this a tough market for many. The last market peak was on the second day of the year, more than four-and-a-half months ago. Compared to the decline in March 2020, this one is shallower but has lasted much longer. In 2020, stocks fell 34% in just more than a month. It was a much sharper downturn, but it didn’t require the same level of patience before it started moving higher.
The biggest reason for the slide was poor first-quarter results by big-box retailers, which earned that moniker for the box-like appearance of their stores. The weak results were caused by the challenges reverberating through our economy. Wages have climbed rapidly. Firms have hired extra workers at higher wages to meet demand. The supply challenges have been two-fold. Some items arrived late and missed their prime selling season, resulting in lost sales. Companies then began ordering goods further in advance to make sure they arrived on time. But sometimes they arrived too early, leaving the company with inventory and storage costs that cut into profitability.
The good news for retailers is the consumer remains well positioned to spend. April retail sales in the U.S. beat expectations and rose 0.9%. March sales growth was revised upward from 0.7% to 1.4%, confirming strong consumer demand. The biggest contributor to overall retail sales was auto sales, which is a good sign since automobile prices have increased rapidly. The industrial production report confirmed that auto manufacturing is back to levels seen prior to the COVID-19 crisis.
Sales at restaurants increased 2% in April month-over-month and are now up nearly 20% since last year. Inflation is driving the spike, but it’s also a sign that the food services industry is finally getting back to normal after several fits and starts caused by new COVID strains. At the same time, sales at grocery stores decreased slightly in April, another sign that Americans are getting more comfortable with going out to eat again.
These strong retail sales numbers certainly point to a very strong U.S. consumer. The increases are not just because Americans are buying the same amount of goods that are now more expensive. The real retail sales figure increased 0.6% last month and has gone up 1.6% in the past three months.
The path to a market recovery has challenges on both sides because inflation is high at the same time the economy is slowing. On one side is inflation. There is very little indication that consumer demand will decline soon, which means price pressures could continue. The other side is a recession, which may occur if interest rate hikes and other factors slow the economy too much. In between is the soft landing the Fed hopes to engineer.
Will stocks avoid breaching the 20% threshold? By the time you read this, they may already have. Rather than get caught up in the negative sentiment created by the market falling another percent or two, focus on the fact that value is improving, and the seeds of the next market rally may have already been planted. That perspective can keep you invested and prepared to reap the rewards if stocks are on sale.
Here’s something to remember during volatile markets. Our brains are hard-wired to avoid loss. Studies have found the pain of loss is far more powerful than the pleasure of gain. This is called loss aversion.
Overcoming loss aversion isn’t easy. One thing that may help is understanding a situation more clearly. For example, knowing more about bear markets may help reduce the fear of these market declines. Here are some facts to consider:
A recession is often defined as an economic slowdown or contraction that persists for two quarters (six months). The United States economy contracted during the first quarter of 2022.9 Although forecasters say there is a low probability (19.6 percent) the economy will contract again during the second quarter, according to a survey conducted by the Philadelphia Federal Reserve. The probability of a quarterly contraction increases (28.2 percent) in early 2023.
It's unclear whether the U.S. will experience a recession. A lot depends on the Federal Reserve’s fight against inflation, which has been made even trickier by the Russia-Ukraine War and lockdowns in China.
According to an audit report (2022-40-036) published on 5/4/22 by the Treasury Inspector General for Tax Administration (TIGTA), a service-wide strategy is needed to address challenges which limit growth in business tax return electronic filing. The report states "This audit was initiated because the IRS's continued inability to process backlogs of paper-filed tax returns contributed to management's decision to destroy an estimated 30 million paper-filed information return documents in March 2021. The IRS uses these documents to conduct post-processing compliance matches to identify taxpayers who do not accurately report their income." The IRS advised the TIGTA that once a tax year concludes, the information returns, Form 1099-MISC (Miscellaneous Information), can no longer be processed due to system limitations. This happens because the system used to process the information returns is taken offline for programming updates in preparation for the next filing season.
May 25, 1977: “Star Wars” Opens in Theaters
On May 25, 1977, Memorial Day weekend opened with an intergalactic bang George Lucas’ blockbuster Star Wars movies hit American theaters for the first time.
With its groundbreaking special effects, Star Wars leaped off screens and immersed audiences in “a galaxy far, far away.” The film made its lead actors, Mark Hamill, Harrison Ford, and Carrie Fisher stars overnight, turning Fisher into an object of adoration for millions of young male fans and launching Ford’s now-legendary career as an action-hero heartthrob.
Star Wars was soon a bona-fide pop culture phenomenon. Over the years it has spawned several more feature films, TV series and an entire industry’s worth of comic books, toys, video games and other products. Two big-screen sequels, The Empire Strikes Back (1980) and The Return of the Jedi (1983), featured much of the original cast and enjoyed the same success, both critical and commercial, as the first film. The film series was re-launched in 1999 with a prequel trilogy to the original Star Wars films, 16 years after the premiere of The Return of the Jedi.
A poem begins with a lump in the throat.
Robert Frost, Poet
There are two things that are important in politics. The first is money, and I can’t remember what the second one is.
Mark Hanna, Former United States Senator
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Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with SPC or S&M. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. This information is not intended as a solicitation of an offer to buy, hold, or sell any security referred to herein. There is no assurance any of the trends mentioned will continue in the future.
Any expression of opinion is as of this date and is subject to change without notice. Opinions expressed are not intended as investment advice or to predict future performance. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance does not guarantee future results. Investing involves risk, including loss of principal. Consult your financial professional before making any investment decision. Stock investing involves risk including loss of principal. Diversification and asset allocation do not ensure a profit or guarantee against loss. There is no assurance that any investment strategy will be successful.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as "The Dow" is an index used to measure the daily stock price movements of 30 large, publicly owned U.S. companies. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system.
The MSCI ACWI (All Country World Index) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2007, the MSCI ACWI consisted of 48 country indices comprising 23 developed and 25 emerging market country indices. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.
The Bloomberg Barclays US Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented.
Please note, direct investment in any index is not possible. Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
Third-party links are being provided for informational purposes only. SPC and S&M are not affiliated with and do not endorse, authorize, sponsor, verify or monitor any of the listed websites or their respective sponsors, and they are not responsible or liable for the content of any website, or the collection or use of information regarding any website's users and/or members. Links are believed to be accurate at time of dissemination, but we make no guarantee, expressed or implied, to the accuracy of the links subsequently.
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