Weekly Market Report: May 20, 2022
A hawkish FOMC and increasing speculation surrounding the recession narrative led risk markets to another rough week with the S&P 500 flirting with bear market territory, posting a seventh consecutive down week while high yield credit spreads closed in on 5%. Interestingly, international equity markets posted strong gains last week across the board. Bonds benefited from a flight to quality bid last week with yields falling 10-15bps on longer maturities while the strengthening USD took a breather, falling 1.35% on the week. Commodity markets posted modest gains with oil up 2.5% to $113 and natural gas rising another 5.5%.
• The extreme volatility and price declines of the S&P 500 has left the market 19% below the early January high but still 78% above the March 23, 2020, low.
• Market technicals haven’t fully reached washed out levels with 10day A/D of 46% and put/call ratios holding up while percentage below 50/200dma and the lower BB of 3,848 looking more oversold. IIAS bull-bear of -15.2% is lower than any reading since the GFC.
• While market corrections are always unsettling, it’s worth remembering how frequent and deep they occur. The median non-recession correction is -12.5% and recession corrections hover around -24%.
• Earnings, dividends, and multiple expansion/contraction are the drivers of stock market returns and the latter has both giveth (2020-2021) and taketh (2022) in grand fashion in recent years.
• 95% of S&P 500 companies have reported a beat rate and margin of 77% and 4.7% respectively but the negative price reaction of 0.5% to positive EPS surprises.
• Market narratives from the Fed and U.S. Treasury Secretary left investors feeling like a policy of hope or luck to avoid recession is pretty fragile but a strong labor market, healthy consumer balance sheets, moderating inflation, and supply chain normalization offer a solid footing.
• Robust consumer balance sheets (demand) support a constructive view of forward growth expectations with $4t in checking and loose currency and $4.5t in money market holdings.
• After breaking above the key psychological level of 3% earlier this month, 10yr UST yields have settled down into the 280’s.
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