HWM Market Recap - July 2022
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We have been getting some questions about the looming recession, and here are our thoughts. Our view is that we are currently in a recession. It began early in the year. The first quarter of the year has already been reported as negative, that is, a contraction or otherwise called negative growth. The second quarter of the year is being predicted as also negative by the Atlanta Fed. They recently revised their forecast from +1% GDP growth to -2.1%. Two down quarters in a row is commonly called a recession. An official recession is somewhat more complicated, but history shows that the additional requirements typically follow the two down quarters. Some experts have forecast that a recession will begin next year, and others predict a recession beginning later this year.
The stock market is a leading indicator of the economy. The substantial drop in the stock market year-to-date is forecasting a recession. Some economists report that interest rates will continue to rise for quite some time. Others are suggesting there may only be one additional rate increase at the Fed meeting in July of half or three-quarters of a point. In fact, market interest rates have come down substantially in the last several weeks. This brings up a historical parallel dating back to late 2018 when the Fed raised rates throughout the year. Late in the year, a significant drop in the market led to an early January 2019 Federal Reserve Board decision to reduce interest rates, known informally as the Powell Pivot (named after Fed Chairman Jerome Powell). At that point, the market realized that the rate increase had concluded, that the Fed was now reducing rates, and the stock market took off. The difference between now and then is inflation. We have substantial inflation now, which is different from late ’18/early ’19. One of the reasons it’s challenging to know what the future will bring is that the decision to raise or lower interest rates has not yet been made. We will have to wait and see. The Fed may go too far, causing a more substantial recession than if they pause or even begin to lower rates in the not-too-distant future.
One point to consider is that it is typical for the stock market to bottom approximately two-thirds and three-quarters of the way through a recession. And so, if the recession is already underway, and we’re substantially into that recession, the market may find its bottom sometime in the months ahead. However, considering those who say there will be a recession later this year or even next year, if the recession hasn’t started already and won’t start for a number of months, we’re looking at potentially the market continuing to go down. That is not how we are reading the economic tea leaves. We think that the recession has already begun, that at some point, the Fed will stop raising interest rates, that interest rates will then start coming down, that the market will reach its bear market bottom, and the next bull market leg will begin.
We believe this current bear market is taking place within a larger multi-year bull market that began in late 2008/early 2009. As typical for bull markets, they tend to run for 15 to 20 years. So our view is that this is a bear market within a larger bull market, and at some point, this bear will run its course, and the longer-term bull market will resume. Of course, whether it happens this year or next remains to be seen. Primarily, we cannot know for sure because it depends on decisions that still have to be made by the Federal Reserve Board and the federal government.
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Monthly Changes in Major Indices
S&P 500: -8.03%
Dow Jones Industrial Average: -6.40%
Nasdaq Composite: -7.79%
Monthly Performance By Sector
Consumer Staples (XLP) -3.12%
Health Care (XLV) -3.70%
Utilities (XLU) -7.25%
Real Estate (XLRE) -8.18%
Industrials (XLI) -8.41%
Communication Services -8.57%
Technology (XLK) -8.69%
Consumer Discretionary (XLY) -9.05%
Financials (XLF) -10.33%
Materials (XLB) -14.16%
Energy (XLE) -16.61%
Monthly Top 5 Performers
Consumer Staples (XLP) -3.12%
Consumer Staples jumped from the third-worst-performing sector last month to the best-performing in June. The leaders for the sector last month included: General Mills Inc (+6.91%), Monster Beverage Corp (+4.10%), Kellogg Co (+3.45%), The Hershey Co (+2.96%), Church & Dwight Co Inc (+2.25%). General Mills (GIS) catapulted to a new 52-week high last month after reporting a better-than-expected quarter, citing higher prices helping lift sales despite selling fewer items.
Health Care (XLV) -3.70%
The second-best performing sector last month was Health Care. Leading the sector was: Bristol-Myers Squibb Co (+2.81%), AbbVie Inc (+2.76%), UnitedHeath Group Inc (+2.06%), Zoetis Inc (+1.06%), Merck & Co Inc (+0.20%). Last month, the Biden administration announced that to prompt consumers to quit smoking, it will move forward with an FDA plan to mandate the elimination of nearly all nicotine in cigarettes.
Utilities (XLU) -7.25%
Despite every stock in the Utilities sector ETF finishing in the negative, it still secured the third best-performing sector. Amongst its leaders included: NextEra Energy Inc (-1.85%), American Water Works Co Inc (-3.91%), DTE Energy Co (-5.43%), Atmos Energy Corp (-5.73%), Consolidated Edison Inc (-5.83%).
Real Estate (XLRE) -8.18%
In the number four spot, Real Estate’s leaders included: Duke Realty Corp (+3.61%), Realty Income Corp (+0.38%), American Tower Corp (-2.40%), Extra Space Storage Inc (-4.15%), UDR Inc (-4.73%). Last month, the giant warehouse operator Prologis Inc (PLD) announced it had agreed to acquire Duke Realty Corp (DRE) for about $26 billion. This announcement marked the largest commercial real estate sale since the pandemic began.
Industrials (XLI) -8.41%
Industrials closed out the month in the fifth-highest spot. Its leaders included: FedEx Corp (+6.94%), Boeing Co (+4.70%), United Parcel Service Inc (-0.77%), L3Harris Technologies Inc (-0.83%), Northrop Grumman Corp (-1.90%).
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As we reach the halfway point of the year, let’s recap some stats for the year so far:
Unemployment rate (December 2021 to May 2022): decreased from 3.9% to 3.6%.
Inflation (preceding 12 months as of December 2021 vs. May 2022): increased from 7.1% to 8.5%.
Ten-year Treasury yield (12/31/202 to the end of June): increased from 1.51% to 3.01%.
Average 30-year fixed-rate mortgage (week of 12/30/2021 to the end of June): increased from 3.11% to 5.7%.
The S&P 500 completed its worst first half of the year since 1970 as soaring inflation and rapidly rising interest rates raise the possibility of a recession. The energy sector also finished its first down month since November 2021.
Last month, the Federal Reserve raised interest rates by 0.75% (75 basis points), the most since 1994.
The Consumer Price Index (CPI) increased by 1% last month and 8.6% over the previous twelve months —the highest annual rate since December 1981. Surging energy, housing, and food prices contributed the most to the increase.
Gas prices reached $5 a gallon nationally for the first time, according to AAA. The national average cost for a gallon of gas was $5.01, meaning households are spending roughly $160 per month more on fuel than a year ago.
The Commerce Department reported on U.S. retail sales showing that sales unexpectedly fell in May, indicating a possible sign of a slowing economy. Additionally, homebuilder sentiment continued its six straight monthly decline, dropping to its lowest level in two years. This could be an early signal that the demand for housing is beginning to show signs of slowing in the wake of rising mortgage rates. According to Freddie Mac, the average rate on 30-year fixed-rate mortgages hit 5.78%, its highest level since 2008.
Last month saw the release of the results of the Federal Reserve’s annual stress test of the nation’s largest banks. The test, which was put in place after the financial crisis of 2007-2009, requires banks to demonstrate that they have enough capital to withstand a series of market and economic shocks. All of the participants demonstrated that they have strong capital levels, which indicates that they are in much better financial condition than during the Great Financial Crisis.
The National Federation of Independent Business (NFIB) released the results of a May survey showing that small business owners’ expectations for the future collapsed to a 48-year low as owners reported inflation continues to be their number one business problem. Additionally, amid a tight labor market, 51% of owners reported job openings they could not fill. 92% of those hiring indicated they encountered few or no qualified applicants for the positions they were trying to fill.
For the first time this year, inflation outpaced consumer spending. In other words, Americans consumed less in May, thus showing that household spending is showing signs of softening. Moreover, it is an early sign that Americans are starting to feel more financially weary. Overall, inflation-adjusted spending remains above the pre-pandemic level.
One in ten U.S. homes sold in the first quarter of 2022 was “flipped,” meaning it was bought and sold within a year by an arms-length buyer. This marks its highest level since 2000. Cities with the most flipping compared to all home sales in that area included: Phoenix with 18.7%, Charlotte at 18%, Tucson at 16.2%, Atlanta at 16.1%, and Jacksonville at 16%.
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