US equities rose this week as the cost of commodities rose. Economic indicators were mixed this week, as durable goods and consumer sentiment slumped while PMI readings beat expectations. The most concerning metric came from consumer sentiment; readings have sagged to fresh lows not seen in more than a decade. Inflation and its impact on financial position is the largest contributor to the low sentiment readings. While war in Europe is further disrupting supply chains and prices, here Stateside, the primary risk to the economy remains inflation. Time will tell whether the Fed is doing too little too late on inflation, but their willingness to act late is better than continuing to invoke that inflation is “transitory.” Overall, the economy is still recovering well from pandemic lockdowns. The biggest threat to the economy remains inflation, and the Fed now appears to be taking the threat more seriously.
Overseas, developed markets performed comparably to emerging markets, with both indices returning positive performance. European indices were mixed while Japanese markets returned positive performance. Improving prospects against the pandemic as well as improved prospects for economic recovery should continue to help lift markets globally over time, but conflict in eastern Europe as well as macroeconomic factors such as inflation and supply shortages continue to pose challenges.
Equity markets were mostly positive this week as investors continue to assess the state of the global economy. While fears concerning global conflict are present for many people, the recent volatility serves as a great reminder of why it is so important to remain committed to a long-term plan and maintain a well-diversified portfolio. When stocks struggle to gain traction, other asset classes such as gold, REITs, and US Treasury bonds can prove to be more stable. Flashy news headlines can make it tempting to make knee-jerk decisions, but sticking to a strategy and maintaining a portfolio consistent with your goals and risk tolerance can lead to smoother returns and a better probability for long-term success.
Chart of the Week
Consumer sentiment is being dragged down to historic lows. The most recent surveys all indicate that the leading cause of negative sentiment is declining financial positions due to inflation and economic outlook.
Market Update
Equities
Broad market equity indices finished the week mixed with major large cap indices outperforming small cap. Economic data has been mostly encouraging, but the global recovery still has a long way to go to recover from COVID-19 lockdowns. Recent disruptions and volatility from the invasion of Ukraine pose further challenges.
S&P sectors were mostly positive this week. Energy and materials outperformed, returning 7.42% and 4.10% respectively. Real estate and healthcare underperformed, posting 0.35% and -0.23% respectively. Energy holds the lead YTD, posting 42.25%.
Commodities
Oil rose this week as crude oil inventories shrunk. Demand is still down compared to early 2020, but as global economies are continuing to recover from the pandemic lockdowns era, oil consumption is continually recovering. On the supply side, operating oil rigs are still well under early 2020 numbers, but trending upwards. In addition to supply and demand, a volatile dollar is likely to have a large impact on commodity prices.
The primary source of volatility for the oil sector is and is likely to continue to be the Ukraine-Russia conflict. Western sanctions could put upward pressure on oil and gas prices.
Gold rose this week even as the U.S. dollar strengthened. Gold is a common “safe haven” asset, typically rising during times of market stress. Focus for gold has shifted again to include not just global macroeconomics surrounding COVID-19 damage and recovery efforts, but also inflation and its possible impact on U.S. dollar value. A new source of volatility will likely continue to be the conflict in Ukraine, as conflict may push investors into safe havens.
Bonds
Yields on 10-year Treasuries rose this week from 2.1494 to 2.4731 while traditional bond indices fell sharply. Treasury yield movements reflect general risk outlook, and tend to track overall investor sentiment. Expected increases in future inflation risk have helped elevate yields since pandemic era lows in rates. Treasury yields will continue to be a focus as analysts watch for signs of changing market conditions.
High-yield bonds fell this week as spreads tightened. High-yield bonds are likely to have stabilized for the short term as the Fed has maintained an accommodative monetary stance and major economic risk factors subside, likely helping stabilize volatility.
A headwind could be on the horizon for fixed income assets, as the Fed has finished its asset purchases which will lower resistance on yields. the Fed is currently projected to raise interest rates 5 more times in 2022, adding additional interest rate risk to fixed income assets.
Lesson to be Learned
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years. So I think — the market is about 3,800 today, or 3,700 — I'm pretty convinced the next 3,800 points will be up; it won't be down. The next 500 points, the next 600 points — I don’t know which way they’ll go. So, the market ought to double in the next eight or nine years. They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.”
–Peter Lynch
Brookstone Indicators
Brookstone has two simple indicators we share that help you see how the economy is doing (we call this the Recession Probability Index, or RPI), as well as if the US Stock Market is strong (bull) or weak (bear).
In a nutshell, we want the RPI to be low on a scale of 1 to 100. For the US Equity Bull/Bear indicator, we want it to read at least 66.67% bullish. When those two things occur, our research shows market performance is typically stronger, with less volatility.
The Recession Probability Index (RPI) has a current reading of 31.05, forecasting a lower potential for an economic contraction (warning of recession risk). The Bull/Bear indicator is currently 33% bullish, meaning the indicator shows there is a slightly lower than average likelihood of stock market increases in the near term (within the next 18 months).
It can be easy to become distracted from our long-term goals and chase returns when markets are volatile and uncertain. It is because of the allure of these distractions that having a plan and remaining disciplined is mission critical for long term success. Focusing on the long-run can help minimize the negative impact emotions can have on your portfolio and increase your chances for success over time.
The Week Ahead
This week will see updates to the Fed’s preferred inflation measure PCE deflator index as well as nonfarm payrolls and the official unemployment rate.
More to come soon. Stay tuned.
