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CCCM WEEKLY MARKET REVIEW

June 27, 2022

U.S. Markets: Signs that inflation may be moderating amid slowing growth fueled stocks to a sharp rally this week, lifting the benchmark S&P 500 back out of bear market territory.  Nearly every sector in the index recorded strong gains, except energy.  The Dow Jones Industrial Average surged over 1600 points last week finishing at 31,501—a gain of 5.4%.  The technology-heavy NASDAQ Composite jumped 7.5% to 11,608.  By market cap, the large cap S&P 500 rallied 6.4%, while the mid cap S&P 400 gained 5.1% and the small cap Russell 2000 jumped 6.0%.

U.S. Economic News:  The number of Americans applying for first-time unemployment benefits fell slightly last week as jobless claims remained near a five-month high.  The Labor Department reported new filings for unemployment benefits fell by 2,000 to 229,000, suggesting a slight cooling in the red-hot labor market.  Economists had expected claims to total 225,000.  New claims had hit a low of 166,000 in March—the second lowest on record—before moving modestly higher over the past few months.  Meanwhile, the number of people already collecting benefits, known as “continuing claims”, rose by 5,000 to 1.32 million.  That number remains near its lowest level since 1969.

Sales of existing-homes fell for a fourth straight month as prices continued to rise rapidly and mortgage rates increased.  For the first time ever, the median price of a home hit a record $407,600.  The National Association of Realtors (NAR) reported U.S. existing-home sales fell 3.4% to a seasonally-adjusted annual rate of 5.41 million in May.  Compared with the same time last year, sales were down -8.6%.  The decline matched economists’ forecasts.  The median home price was up 14.6% compared to May of 2021.  Furthermore, the number of homes on the market rose 12.6% to 1.16 million units.  That reading is down -4.1% from a year ago and represents a 2.6-month supply of homes on the market.  Analysts generally consider a 6-month supply of homes a “balanced” housing market.  Analysts don’t see housing returning to growth anytime soon.  Lawrence Yun, chief economist at the NAR stated, “I do anticipate further declines in home sales, as the impact of higher mortgage rates has not been fully reflected in the data.”

U.S. businesses suffered sharp slowdowns in June, according to a pair of surveys from S&P.  The S&P U.S. services index fell 1.8 points to a five-month low of 51.6 in June, based on a preliminary “flash” survey.  Readings above 50 signify expansion, while below indicates contraction.  It was a similar story with the U.S. manufacturing index.  That index slid to a nearly two-year low of 52.4—down from 57.  The one positive of the report—weaker demand triggered declines this month in the cost of business supplies and what companies charge.  Chris Williamson, chief business economist at S&P Global, said it could be a sign that inflation has peaked.  “The pace of U.S. economic growth has slowed sharply in June,” Williamson said. “Business confidence is now at a level which would typically herald an economic downturn, adding to the risk of recession.”

Federal Reserve Chairman Jerome Powell appeared in front of both houses of Congress this week.  In remarks to the Senate Banking Committee, Powell said, “The American economy is very strong and well positioned to handle tighter monetary policy.”  He said GDP has picked up since a weak first quarter and that consumer spending remains strong.  Powell told the lawmakers that the central bank is committed to bringing inflation down and that additional rate hikes are coming.  He said that only the size of the upcoming moves has not been decided.  To the House of Representatives, Powell stated he has an “unconditional” commitment to fight inflation.  Krishna Guha, a former Fed staffer now vice-chairman of Evercore ISI, noted that Powell did not use the word "unconditional" in his testimony to the Senate.  Guha said that "unconditional" implies a readiness by the Fed to accept higher unemployment, and a recession, in order to get inflation down. 

The sentiment of the nation’s consumers fell to an all-time low this month, reflecting the broad dismay over high inflation—especially food and gas prices.  The University of Michigan reported its Consumer Sentiment Index came in at 50, which was the lowest reading in the 44-year-old history of the survey.  The U.S. is in the midst of its worst inflation in 40 years, consumers are seeing their standard of living decline and businesses are struggling to cope as well.  The Federal Reserve is raising interest rates aggressively to try to tame the surge in prices, but the central bank risks triggering a recession.

The U.S. economy should continue to grow over the next several months, according to St. Louis Federal Reserve President James Bullard.  Bullard made the comments even as some economists and analysts stated a severe recession is inevitable given inflation and rising interest rates.  Bullard expects expansion to continue stating, “On GDP growth, I think that the indicators are that there will be continued expansion in the quarters ahead.”  In addition, he stated that labor market was “as good as you’re ever going to see” right now.  Bullard warned that the current high inflation remains “far above target” and is very risky for the U.S. economy.  Bullard was quick to point out that there are few similarities between now and the last time the U.S. had rampant inflation—the late 1970’s and early 80’s when Paul Volcker was Chairman of the Federal Reserve.  “Modern central banks…have far more credibility than Volcker,” Bullard said.

The U.S. economy expanded in May, but growth cooled sharply compared with the previous month.  The Federal Reserve Bank of Chicago’s National Activity Index (CFNAI) fell to 0.01 in May, from a revised 0.4 in April.  Economists had expected a reading of 0.35.  The CFNAI index is composed of 85 economic indicators from four broad categories of data: production and income, employment, personal consumption and housing, and sales, orders and inventories.   The index is designed to gauge overall economic activity and inflationary pressures with a zero value for the monthly index indicating the economy is expanding at its average trend.  The category which contributed most negatively to the index was personal consumption and housing, which subtracted 0.11 points in May.  Production indicators were also sharply down.

Finally:  It turns out that Americans spend more on pharmaceuticals than any other country in the world—and not just more—a lot more.  The OECD reported the average American spends $1376 per year on medications, while Sweden spends just $540.  A new study from Harvard Medical School estimated Medicare could save almost $4 billion per year if it were to purchase medications from a wholesaler, such as billionaire Mark Cuban’s CostPlus Drug Company (www.costplusdrugs.com), rather than the tangled web of private brokers and pharmacies it currently uses.  The study showed that in some specific cases Medicare was being charged 800%+ more than what they could pay if they had gone direct or via Cuban's new company. (Chart by chartr.co)

 

(Sources: All index- and returns-data from Yahoo Finance; news from Reuters, Barron’s, Wall St. Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat,0020Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet.)

The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal. 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 S&P Mid Cap 400® provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500®, measures the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index The Purchasing Managers' Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. One cannot invest directly in an index. Past Performance does not guarantee future results. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated. 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.


June 21, 2022

U.S. Markets: The Federal Reserve’s most aggressive rate hike since 1994 raised fears of a recession and sent stocks sharply lower for a second consecutive week.  The benchmark S&P 500 index recorded its worst weekly decline since March 2020 and officially entered a bear market—defined as down more than 20% from a recent high.  All of the major benchmarks finished the week deep in the red.  The Dow Jones Industrial Average shed over 1500 points and gave up the 30,000-level closing at 29,889—a decline of -4.8%.  The technology-heavy NASDAQ Composite, likewise, ended the week down -4.8%.  By market cap, the large cap S&P 500 retreated -5.8%, while the mid-cap S&P 400 plunged -7.6% and the small cap Russell 2000 finished the week down -7.5%.

U.S. Economic News:  The number of Americans filing first-time unemployment benefits remained near a 5-month high, pulling back just slightly from last week.  The Labor Department reported new filings for unemployment benefits fell by 3,000 to 229,000.  Economists had expected new claims to total 220,000.  Chief economist Joshua Shapiro of MFR Inc stated, “The recent move up bears watching to see if it develops into an early signal of developing cracks in the demand for labor.”  The four-week average of new jobless claims, smoothed to iron-out the weekly volatility, rose to 218,500—also the highest level since January.  Mahir Rasheed, economist at Oxford Economics noted, “While the level of claims remains low, and the overall labor market remains extremely tight by historic standards, the latest data suggest that some sectors may be experiencing a modest uptick in layoffs amid rising concerns over inflation.

The National Association of Homebuilders (NAHB) reported confidence among the nation’s home builders fell for a sixth consecutive month as rising interest rates pushed mortgage rates higher.  The NAHB’s Housing Market Index slipped by two points to 67.  The decline matched economists’ estimates.  One year ago, the index stood at 81.  The June reading of 67 was the lowest since June 2020.  The three gauges that underpin overall builder confidence index also experienced drops.  The gauge that measures current sales conditions fell by one point, while the component that tracks traffic of prospective buyers fell by five points.  The gauge that assesses sales expectations for the next six months fell by two points.  The average rate for a 30-year fixed-rate mortgage rose 25 basis points, from 5.4% to 5.65% for the week ending June 10, according to the Mortgage Bankers Association. 

The Federal Reserve demonstrated it wanted to be aggressive in its fight against inflation, enacting the largest interest-rate hike in almost three decades and signaling its benchmark interest rate will rise to nearly 4% by the end of next year.  At the central bank’s meeting, officials said they would hike the federal funds target rate by three-quarters of a percentage point to between 1.5% and 1.75%.  Fed Chairman Jerome Powell said the Fed might raise interest rates at its next meeting by another 75 basis points, but, he cautioned, “I do not expect rate increases of this size to be common.”  In its policy statement, the Fed said it is strongly committed to getting inflation down to 2%.  In its economic forecasts, the Fed expects the economy to slow to a 1.7% growth rate this year and in 2023.  The Fed said it would adjust its interest-rate policy if risks emerge that would “impede” the Fed from its goals.

Confidence among the nation’s small business owners slumped last month, and expectations of future business conditions continued to deteriorate amid persistent inflation, supply shortages, and lack of qualified labor.  The National Federation of Independent Businesses (NFIB) reported its ‘Small Business Optimism Index’ ticked down to 93.1 in May—the second consecutive decline.  However, most concerning is the number of small business owners who expect better business conditions in the next six months declined to an all-time low in the almost 50-year history of the survey.  Inflation pressures broadened.  The percentage of owners raising average selling prices increased two points to 72%, back to the highest reading in 48 years.  NFIB Chief Economist Bill Dunkelberg noted, “Inflation continues to outpace compensation which has reduced real incomes across the nation.”

Prices at the wholesale level jumped again, implying inflation will continue for the foreseeable future.  The government reported its Producer Price Index climbed 0.8% in May, to an annualized 10.8% in May.  Just a year and a half ago, prices were rising at a less than 2% pace.  So-called core wholesale prices, which omit food and energy, rose 0.5% in May.  Higher gasoline prices accounted for the majority of the increase in wholesale inflation, but prices were up across the board.  High inflation at the wholesale level suggests there will be little relief soon at the consumer level.  When companies have to pay more to operate their businesses, they usually pass the price increases onto customers.

Sales at U.S. retailers pulled back in May, the first decline since the end of last year.  Sales were down ‑0.3% as rising inflation weighed on consumers.  The reading was worse than economists’ forecasts of a 0.1% increase.  After adjusting for inflation, real retail sales were actually down -1.0% last month.  Economist Katherine Judge of CIBC Economics wrote in a note, “While it’s only one month, this is a sign that higher prices are starting to thwart consumer demand.”  Retail sales figures are closely watched by analysts as consumer spending accounts for roughly 70% of GDP. 

Finally:  After 27 years, Microsoft’s support for its once dominant internet browser ‘Internet Explorer’ (IE) has come to an end.  At one point, IE’s market share was estimated to be as high as 90%, primarily due to its bundling with the Windows operating system that essentially forced its use over other 3rd party options, like Netscape Navigator.  And while Microsoft has tried to push its current browser “Edge”, it’s had little success there as well—currently holding only about 4% of market share.  The clear current winner is Google’s Chrome browser, whose users report much faster loading speeds and tabs that crash less frequently (and don’t affect your other open tabs when they do). (Chart by chartr.co)                

(Sources: All index- and returns-data from Yahoo Finance; news from Reuters, Barron’s, Wall St. Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet.)

The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal. 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 S&P Mid Cap 400® provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500®, measures the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index The Purchasing Managers' Index (PMI) is an indicator of the economic health of the manufacturing sector.

The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. One cannot invest directly in an index. Past Performance does not guarantee future results. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated. 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



In the ever-changing landscape of finance we must ensure our clients are properly invested based upon their investment goals and objectives.

Peter Chapman




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