Economic Update 7-25-2022

• Economic data for the week included weakness in housing markets—seen in disappointing results for existing home sales, housing starts, and homebuilder sentiment. The index of leading indicators continued a string of monthly declines, and jobless claims rose.

• Global equities experienced gains again last week, with foreign markets leading U.S. Bonds fared positively as well, as long-term interest rates tempered, and foreign debt was helped by a weaker dollar. Commodities were mixed with metals recovering, but grains prices falling with higher expected imports from war-torn Ukraine.

U.S. stocks fared positively again, with lackluster economic data pointing to the idea the Fed may not need to raise rates as aggressively as feared (such as an upcoming week increase of potentially 0.75% rather than 1.00%), as well as continued negative sentiment being indicated by low equity ownership and high cash levels, pointing to a potential turnaround. After a positive start Monday, stocks turned mildly negative upon a report that Apple is slowing hiring. In fact, this is how recessions can become self-fulfilling, with companies not wanting to be left holding the bag, so begin the pare back first. The Senate vote in favor of the Chips for America Act, which provides $52 bil. in domestic subsidies for computer chip foundry production and tax credits, boosted tech stocks (notably semiconductors) early in the week.

By sector, consumer discretionary stocks led, with gains of nearly 7%, followed by industrials and materials. Laggards included the normal defensive sectors health care and utilities, which earned minor declines. Real estate gained around 3%, with the help from lower interest rates.

The continued question is: what about earnings? So far, responses have been largely individualized by company, with some better than expected and some worse. With equity price multiples having already declined, earnings expectations would be the natural next phase to potentially conclude the bear market, but such downward revisions have not yet occurred. This isn’t to say they won’t occur later in the Q2 reporting, or in Q3 or Q4. We just haven’t seen the extreme negativity in earnings so far, although sentiment from surveys, such as fund managers, remains very bearish—in fact, as much so or more than in 2008. Of course, this would be seen as a bullish sign for risk-taking, when doing so seems like an unpopular idea. Another sign of contrarian optimism is the fact that institutional short positions have moved to very high levels—reminiscent of prior pullbacks, seen twice a decade or so—and often followed by recoveries.

Foreign stocks slightly better than those in the U.S., with help from a weaker dollar. Europe and Japan outperformed the U.K. and emerging markets, with European sentiment helped by Russian natural gas shipments resuming. In EM, several larger index members performed well, but were held back by flattish returns in Brazil and China. Chinese policymakers attempted to reduce stimulus expectations, in order to avoid financial excesses, while GDP expectations were also in doubt. Concern remains over the handling and continued high debt levels in the Chinese real estate development sector.

The ECB raised interest rates by 0.50%, more than the expected 0.25%, which remained controversial due to the even more fragile forces in Europe between inflation and slowing economic growth (tenuous due to high energy price concerns). The other component challenging the ECB is the recent widening of spreads in Italy, which has happened frequently in the past when investors feel less comfortable with risk-taking, due to their higher debt load. However, for ECB policy to work smoothly, too-wide spreads between member countries’ bonds can be problematic, hence the ‘anti-fragmentation’ measures to help tighten these differences.

U.S. bonds fared positively, as longer-term treasury yields reached their lowest levels in two months. High yield fared better than the rest of the pack, in keeping with stronger equity results. Foreign bonds were helped by an over -1% drop in the value of USD, particularly in emerging markets.

Commodities were mixed on the week, as gains in industrial metals and energy offset a decline in agricultural prices. The price of crude oil fell by -3% to just under $95/barrel, with demand still threatened by recession fears and higher supplies. Natural gas prices rose over 15% Gas appeared to be flowing again through the European Nord Stream pipeline, which led to improved market sentiment—as worst case scenarios could be averted—but heat waves in the U.S. and Europe drove demand sharply higher. Grain prices fell back after a Ukraine-Russia export deal was signed to allow shipments to nations in dire need, in efforts to reduce the potential for a global food crisis.

Period ending 7/22/2022	1 Week (%)	YTD (%)
DJIA	2.00	-11.24
S&P 500	2.57	-16.17
NASDAQ	3.33	-24.05
Russell 2000	3.59	-18.96
MSCI-EAFE	4.43	-17.31
MSCI-EM	3.00	-18.16
Bloomberg U.S. Aggregate	1.17	-8.74

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
7/15/2022	2.37	3.13	3.05	2.93	3.10
7/22/2022	2.49	2.98	2.87	2.77	3.00

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.