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Key Points for the Week

  • The S&P 500 declined for the seventh straight week and narrowly missed entering a bear market. (A bear market is defined as a 20% drop from a high point in the market.)
  • Retail sales climbed 0.9% showing the consumer remains willing to buy items even as prices have increased.
  • Retailers struggled with higher labor and shipping costs and uncertain supply chains. Earnings dropped while sales increased.

Be Aware of Identity Theft

We have recently seen an uptick in various forms of identity theft. Please be vigilant in protecting your personal and financial information from potential scams. In order to reduce your risk of identity theft, please review our list of prevention tips here. If you have any questions or think you may be a victim of identity theft, please contact us.


Economic Update

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:

  • Feeling greedy: During bull markets, everyone wants to invest. The market is moving higher, and nobody wants to miss out. As a result, investors become so enthusiastic that they are willing to pay higher share prices than companies may be worth. Former Federal Reserve Chair Alan Greenspan called this “irrational exuberance.”
  • Feeling fearful. During corrections and bear markets, when the market is moving lower, no one wants to invest. Some investors become so concerned, they sell, which drives prices even lower. Investors who sell accept a loss of principal; a decision that can negatively affect their ability to reach long- and short-term financial goals.

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.

This Week in the 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.

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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.

Stocks on Sale?

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.

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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.

About Loss Aversion, Bear Markets and Recessions

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:

  • Bear markets are not uncommon. There have been 11 bear markets since 1956, reported Mark Kolakowski of Investopedia. The shortest bear market lasted one month (February 2020) and the longest was 31 months.
  • Bear markets are price declines of 20 percent or more from a previous peak, reported Georgina Tzanetos of Bankrate. A major stock index (like the Dow Jones industrial Average, Standard & Poor’s 500 Index or Nasdaq Composite), an asset class (stocks, bonds, etc.), or an individual stock can experience a bear market.
  • Bear markets sometimes precede recessions, but not always. Stock markets reflect what investors think may happen in the future. When they drop, it’s often because investors see hard times ahead. Eight of the last 11 bear markets have occurred before a recession.

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.

IRS Destroyed Millions of Paper-Filed Taxpayer Documents

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.

To view the report found on www.treasury.gov, click here.

Did you Know? This Week in History

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.

Weekly Focus

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