Economic Update 6-27-2022

• Economic data for the week included a drop in existing home sales offset by stronger sales for new homes. Consumer sentiment fell to an all-time low, although long-term inflation expectations improved (declined) from an earlier report.

• Global equity markets recovered sharply last week with sentiment improving, as inflation may be showing signs of slowing. Bonds also fared positively, with yields falling and corporate spreads tightening. Commodities also fell back in a variety of segments, including grains, metals, and natural gas.

U.S. stocks recovered last week, reversing a recent losing streak, as markets sensed additional stability in inflation and a slowing in economic growth (leading to lower inflation). After starting the week up sharply, perhaps with President Biden’s comments that a recession wasn’t inevitable, after consulting with economist and former Treasury Secretary Larry Summers, which implied possible policy adjustments, sentiment improved further. Friday featured the annual reconstitution of the Russell indexes, which often results in one of the highest-volume trading days of the year, due to $12 tril. in assets tracking these indexes (per Blackrock). The largest shifts tend to occur between ‘growth’ style boxes of the Russell 1000 and 2000 (which often receive the stocks with more recent higher earnings growth scores, such as energy) and ‘value’ (where weightings are raised for stocks recently underperforming, including some technology stocks interestingly).

Comments from Fed chair Powell, in semi-annual Senate Banking Committee testimony, alluded to further hopes for a ‘soft landing’, although giving the impression that fighting inflation continues to take precedence over avoiding a recession. It’s been reiterated again and again that it is ‘absolutely essential’ for the Fed the achieve price stability, albeit a soft landing being potentially ‘very challenging’ to accomplish. This is a view markets have seemed to embrace, likely realizing that the negative long-term consequences of inflation are far more damaging than a possibly-weak recession, given the few financial excesses in the current business cycle (compared to cycles in the recent past).

Nearly every sector gained ground last week, led by consumer discretionary, health care, and technology up over 7% along with broad market strength. Real estate also gained nearly 8%, as interest rates fell back from recent highs.

Foreign stocks also performed positively last week, albeit to a lesser degree than in the U.S., despite the help from a weaker U.S. dollar. Slowing economic growth pared back expectations for a more aggressive central bank response in coming meetings. Returns were relatively similar across geographies, although China outperformed in emerging markets, in keeping with a continued recovery theme and announcements of additional government stimulus measures.

U.S. bonds gained ground last week, as interest rates pulled back from recent peaks. Treasuries outperformed investment-grade corporates a bit, although high yield corporates were the best-performing of all sectors, following the lead of equity markets higher. Foreign bonds also gained, due to lower rates and the positive influence of a weaker dollar. Russian stocks experienced a technical default over the weekend, as certain grace periods expired, but payment mechanisms to U.S. banks remain closed (although more than enough funds currently exist to make the interest payment, rendering the default symbolic at this point).

Commodities fell back, again moving in a contrary direction to stocks and bonds. While the price of crude oil was minimally changed last week, remaining at just under $108/barrel, agriculture (wheat), industrial metals (due to nickel but also copper), and natural gas all fell back sharply upwards of 5-10%. President Biden put forth a plan for a 3-month gas tax holiday, which would represent about 4% of the current national gas retail price, as well as encouraging states to implement the same with state gas taxes. However, Congressional approval does not appear to be a slam dunk. Regardless, the minimal actions may not be substantial enough to really move the needle on easing energy price pressures on households. Regardless, from highs earlier this month, oil prices have stealthily corrected by -14%, before recovering a bit later in the week. This price erosion has been due to concerns over slowing demand have outweighed those about lower supply as the Russia-Ukraine conflict continues to grind away with little movement in either direction, pointing to a protracted conflict. It’s also predicted that OPEC+ members will be upping production, further enhancing available supply. However, crude availability is unable to do much to aid a lack of gasoline refining capacity in the near-term, which offers fewer solutions for current high prices going into the peak travel period.

Period ending 6/24/2022	1 Week (%)	YTD (%)
DJIA	5.39	-12.43
S&P 500	6.46	-17.31
NASDAQ	7.51	-25.52
Russell 2000	6.02	-20.88
MSCI-EAFE	2.83	-18.39
MSCI-EM	0.80	-16.95
Bloomberg U.S. Aggregate	0.61	-10.94

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2021	0.06	0.73	1.26	1.52	1.90
6/17/2022	1.63	3.17	3.34	3.25	3.30
6/24/2022	1.73	3.04	3.18	3.13	3.26

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.