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Key Points for the Week
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Last week, major U.S. stock indices moved higher for the first time in 7 weeks. The Dow Jones Industrial Average gained 6.2 percent, the Standard & Poor’s 500 Index was up 6.6 percent, and the Nasdaq Composite rose 6.9 percent, reported Ben Levisohn of Barron’s.
The change in investor attitude may have been influenced by a variety of factors, including:
The rally…extended on Wednesday when the Federal Reserve, while acknowledging that it will lift interest rates further in the next couple of meetings, implied that it may slow down the pace of rate hikes if the economy continues to slow down
Jack Denton and Jacob Sonenshine, Barron’s
While last week’s U.S. stock market rally was appreciated, markets are likely to remain volatile for some time.
The S&P 500 ended its string of seven negative weeks by rallying 6.6% last week. The surge in stock prices gave the index some margin between its current price and the 20% decline the index flirted with just two weeks ago.
The Federal Reserve’s minutes from its last meeting confirm the Fed expects to raise rates 0.5% the next two meetings and then evaluate how inflation has changed. The minutes didn’t provide any surprises and reassured investors that they are reading the Fed’s intentions well.
PCE (personal consumption expenditures) inflation data provided markets a boost by indicating the slowing inflation trend in the Consumer Price Index was confirmed in the PCE data as well. Core PCE inflation, which excludes food and energy, increased 0.3% for the third consecutive month, and the yearly gain dipped below 5%. Inflation, including food and energy, was even lower because fuel prices fell in April. Next month, we expect inflation to jump because of higher fuel prices. We will watch core inflation to see if the trend toward slower inflation continues.
Broader economic conditions remain strong. Durable goods orders climbed 0.4% and business investment rose 0.3% last month. Companies are likely ramping up investments in machines and other labor-saving devices to mitigate tight labor markets and high wage growth.
Global stocks rallied with the S&P 500. The MSCI ACWI leapt 5% The Bloomberg U.S. Aggregate Bond Index gained 0.8%. The U.S. employment situation leads the list of key economic reports this week. We’ll be paying attention to the overall job gains and how quickly wages are climbing.
What causes markets to reverse direction so rapidly after seven weeks of decline? The S&P 500 rose 6.6% higher last week after barely avoiding the classic definition of a bear market the week before. Our comment last week that “…value is improving, and the seeds of the next market rally may have already been planted,” looks pretty good in retrospect, but we certainly didn’t forecast a 6.6% rally.
Last week’s rally was likely caused by a number of factors aligning to send markets higher. Let’s review:
None of these factors were overwhelming, but the combination of better economic data and a kinder-than-expected Fed contributed to the gains.
Will markets finally calm down? Our expectation is they will not. The risks of stubborn inflation, an overaggressive Fed, and a possible recession all declined last week, but they didn’t go away. Also, markets are usually volatile in an election year.
There has been a 1% move every week this year, and big moves to the upside can reverse quickly. Upside volatility still counts as volatility and suggests investors can switch their sentiments quickly. The daily swings in the last weeks also suggest the market remains volatile. The last six weeks have experienced some of the biggest daily moves. This market is likely capped in how far it can run until better inflation data signal the macro risks are decreasing. Then volatility may start going down.
As of May 14, 2022, the IRS had 9.8 million unprocessed individual returns, including a backlog of 7.4 million paper returns waiting to be processed, and 2.4 million unprocessed individual returns that required special handling. There are also millions of unprocessed amended tax returns, which the IRS has indicated will take longer than the normal 16 weeks to be processed. Lastly, there are just under 300,000 amended employer quarterly federal tax returns that have not been processed. The IRS has not provided an estimated timeframe for when these returns will be processed.
June 2, 1935: Babe Ruth Retires
On June 2, 1935, Babe Ruth, one of the greatest players in the history of baseball, retired after 22 seasons, 10 World Series and 714 home runs. The following year, Ruth then became one of the first five players to be inducted into the baseball hall of fame.
Ruth’s rise to stardom began when he made his Major League debut as a left-handed pitcher with the Red Sox in July 1914. He pitched 89 winning games for the team before 1920, when he was traded to the New York Yankees. After Ruth left Boston, in what became known as “the curse of the Bambino,” the Red Sox didn’t win another World Series until 2004. In New York, Ruth’s primary position changed from pitcher to outfielder. Ruth was a huge star in New York and attracted so many fans that the team was able to open a new stadium in 1923, Yankee Stadium, dubbed “The House That Ruth Built,” after having led the Yankees to seven American League pennants and four World Series victories.
Many of the records Ruth set remained in place for decades. His career homerun record stood until 1974, when it was broken by Hank Aaron. Ruth’s record of 60 homeruns in a single season (1927) of 154 games wasn’t bested until 1961, when Roger Maris knocked out 61 homers in an extended season of 162 games. Ruth’s career slugging percentage of .690 remains the highest in Major League history.
Ruth died of throat cancer at age 53 on August 16, 1948, in New York City. His body lay in state at Yankee Stadium for two days and was visited by over 100,000 fans.
It's not about what it is, it's about what it can become.
Dr. Seuss, Author and Poet
It takes time to create excellence. If it could be done quickly, more people would do it.
John Wooden, Basketball Coach and Player
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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.
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