May 2022 - Market Update

Market Update

May 2022

Key Observations

As we stated in our last market update, market corrections are not uncommon. In fact, they happen more frequently than most investors care to remember. And following the V shaped recovery we experienced post-COVID, the market was due for a pullback of some kind.

The Fed’s number one priority, even among its most dovish members, is to combat inflation. Last week, Lael Brainard, the Fed’s Vice Chair reiterated that the Fed will be highly data driven when making policy decisions and will need to see solid, consistent data that prices are coming down before slowing down the tightening process. If economic data is too strong in the short-term, it could ultimately push up inflation and cause Fed to lean towards more tightening. This is the classic Goldilocks scenario where the market is looking for data to be positive…but not TOO positive to trigger the fed to accelerate tightening. However, a strong labor market, solid manufacturing data, and consumers and businesses still flush with cash will hopefully provide enough support for the economy as interest rates rise.

While May remained a volatile month for markets across the board, we have bounced considerably from the YTD lows we witnessed in mid-May and are currently down 13%.

Data Dashboard

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Stock Market

The S&P 500 flirted with recessionary territory throughout the month but has ultimately bounced off lows of -18% to end the month down 13% from the early January peak. Month over month, the S&P was relatively flat with considerable divergence among sectors. Energy, and in particular natural gas, once again led the way in gains with the ongoing Ukraine-Russia conflict showing no signs of abating.

Real estate and consumer discretionary sectors saw poor performance in May. Retail profits were squeezed by higher cost of goods sold and a reduction in consumer demand. Inventory levels are recovering and consumers are beginning to shift back to a more services-focused demand as opposed to the COVID induced rush for durable goods. There is still room for margins to compress in durable goods, which could happen if prices continue to inflate.

Mortgage rates have gone up by about 2% and the real estate sector is beginning to feel the effects. Consumers have invested heavily in their homes, and supply remains limited. Lines are still around the corner for some open houses, but higher borrowing costs should reduce demand slightly at these rates.

May Monthly Returns (by US Sector)

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Bond Market

Bond market activity over the last month has been relatively uneventful. The yield curve remained stable. Credit bonds, less sensitive to interest rates, rebounded a bit in tandem with the overall rebound in the equities market.

Economics

The Federal Reserve policy committee has reiterated that fighting inflation will still be its number one priority over at least the next several months. The market has priced in an additional 2% in rate hikes through the end of the year. The expectation is currently that we will see 0.50% hikes in June, July and possibly September followed by 2 more 0.25% hikes before the end of the year. Vice Chair Brainard gave some support to that expectation, stating on June 2nd that the Fed wants to see a consistent string of decelerating monthly inflation prints before the committee will feel confident that we are on track to getting average inflation back to our 2% goal. We are starting to see some glimpses that the policy action is starting to trickle down through the economy with inflation indicators beginning to show positive signs and the massive customer demand for goods beginning to retreat.

Prior to the Ukraine invasion, Russia pumped 11% of global supplies. Sanctions along with the recent European partial ban on Russian oil has led to ever increasing prices at the pump. The US has stepped up diplomacy with Saudi Arabia, the world’s largest producer, in recent weeks and OPEC and its allies agreed this week to a larger than expected increase in oil production of 600k barrels a day. Whether or not this will stem the seemingly endless rise in gas prices remains to be seen.

Tactical Updates

For Tactical equity portfolios, we sold positions in precious metals and materials while also eliminating exposure to Brazilian and Australian equities in favor of Japanese and Mexican equities. We purchased more domestic (US) equities by means of Large Cap Value and Consumer Staples. We remain invested in energy and oil companies as we have seen the energy sector continue to outperform. Throughout May, energy related positions have continued to carry our performance while we cut losses in other exposures.

As for Tactical Fixed Income portfolios, there were no trades for the month of May and we remain invested in floating rates loans and ultra-short treasury bills.

General Client Considerations

Please remember that we are here as a partner to answer your questions and advise you to the best of our ability. As always, if you have any questions or concerns regarding your account, please reach out.

Thanks,

The Friedenthal Financial Team

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