May 2022 Market Commentary

May 2022 Market Commentary

Financial Insights

Early May was a continuation of 2022’s downtrend. By the second half of the month however, equity prices had staged a recovery.  YTD losses remain in place, but investors were relieved that seemingly relentless selling pressure had yielded to a more positive tone. 

Volatility remains elevated and advances during the waning days of the month were on lower trading volumes than declines, but the ability of equities to recover from sharp losses earlier in May was welcomed, across the globe.  Performance of key equity benchmarks is shown below:

Screen Shot 2022-06-08 at 11.02.59 AMBut it was not only equities that built a rally after the extreme selloffs that have occurred several times this quarter. Bond prices reversed their virtually inexorable decline and the dollar, whose value against a basket of currencies has been steadily appreciating this year, began to give back some ground. We won’t hazard a guess whether or how long these trends will continue but relative firmness after this year’s declines in both equity and bond prices is certainly preferable to the alternative.

Earnings season for the first quarter is largely behind us and while results were generally positive, the number of companies either missing revenue and/or profit projections was significantly higher than in the previous several quarters.  Additionally, the number of companies hedging their guidance for the second half of 2022 grew. Analysts remain sanguine, so far.1 

Retailers, in their filings and on analyst calls have cited growing consumer price resistance for non-essential items. As increasing portions of workers’ compensation are swallowed by fuel, utility, and food expense, discretionary income, savings rates, and credit card balances are all moving in unfavorable directions. Stagflation remains the dominant economic trend. 

The below chart from the Federal Reserve details the current levels of consumer savings and credit card debt. As savings decline and credit card balances increase, the outcome can only be that the boom in individual expenditures that began in 2020 will moderate.

Screen Shot 2022-06-08 at 11.05.14 AMConsumer confidence and sentiment measures remain depressed and express a spreading conception that rising costs will be a reality for the foreseeable future.2 President Biden’s assurances that he has a plan to combat rising prices have been met with widespread skepticism. Statements from the President and several cabinet members have reinforced the perception that policy is being driven by a single-minded focus on combating climate change. 

The administration has implied that high gasoline costs, for example, are the foundation of their goal to convert US power sources from fossil fuels to sustainable green energy.3 However, this appears to be a goal without a defined implementation plan other than citizens’ pain.

Alternative energy sources currently power 20% of our energy grid,4 but the President and his advisors apparently believe that if consumers are priced out of traditional means to drive, and to heat and cool their homes and offices, viable solutions will emerge, spread, and be embraced. The unfortunate result of this logic is steadily rising costs for virtually everything that are devouring increasing percentages of Americans’ disposable income. Wage increases are simply not keeping up with prices.

In blunt terms, inflation is eating middle class and low income consumers alive, with no clear solutions in sight. 

The President rarely mentions inflation’s origins except to blame the war in Ukraine and “greedy corporations.” The only component in the administration’s newest inflation fighting plan is for Congress to appropriate additional spending to “lower costs,” which is transparently a euphemism for direct payments to a segment or segments of the population.4 Similar payments, helicoptered into a sharply rebounding economy from late 2020 through 2021, were likely a key initiator of the current price spiral. To assert that additional deficit spending will reduce inflation contradicts economic dynamics.

The Federal Reserve has embarked on a well-publicized path toward raising short term interest rates to roughly 2-2¼% by fall but appears to be the only government entity taking concrete steps to stem inflation. As we have previously observed, however, this higher level of borrowing costs is unlikely to have the desired effect on an 8-9% CPI, unless its result is an economic slowdown.

This month, the central bank begins a reduction of its balance sheet assets, as the Fed’s holdings of US Treasury bonds and mortgage backed securities are trimmed. The slight downturn seen at the extreme right in the below chart should continue through the summer, at least. How removal of the bond market’s “floor” (price support) will affect future trends remains a known unknown.

Screen Shot 2022-06-08 at 11.08.48 AMBased on a plethora of polls, voters seem likely to hand Congress to Republicans in November, with inflation repeatedly cited as the number one concern. The Executive Branch and many legislators appear to believe that soaring energy costs will alter consumer behavior and transition the US from fossil fuel dependence over a short period of time. We suspect this position will be rejected in the mid-term Congressional elections.

Corporate earnings are beginning to show stresses from inflation, as is the entire economy. Mr. Biden and his supporters have been intransigent in their quest to eliminate fossil fuels as the country’s predominant energy source, but the constraint they ignore is that alternative sources cannot replace the spectrum of uses for petroleum and natural gas, which are integral, for example, in the production and maintenance of solar and wind energy devices.

The perception vs. reality of electric vehicles was recently weighed by a Wall Street Journal reporter who decided to test the feasibility of electric auto travel, in this case on a road trip from New Orleans to Chicago. The article is cited below and makes interesting reading.6 

Advances in electric car and battery technology will no doubt mitigate some of the issues faced in this trip, but the question is, “When?” Consumers are seeking immediate relief, not at an unspecified and unknowable future date when reasonably priced solutions may or may not be discovered, perfected, and/or produced.

Investors that have maintained discipline through 2022’s declines are being rewarded for “standing still.” After months of general weakness, recent market action has suggested an intermediate uptrend could develop over the next several weeks or longer, but we have ample evidence that recent advances have been fragile. Unexpected negative news, shrinking consumer assets, and rising interest rates remain the markets’ most important adversaries. 

1 “Analysts Lowering EPS Estimates for Q2 2022 but Not Lowering EPS Estimates for 2H 2022,” www.factset.com, June 3, 2022. 2“Surveys of Consumers,” www.sca.isr.umich.edu, Final results for May 2022. 3“Backlash as Biden Says High Gas Prices Are Part of 'Incredible Transition',” www.newsweek.com, May 24, 2022. 4“What is U.S. electricity generation by energy source?” www.eia.gov, Preliminary 2021 data a/o February 2022. 5“The Biden-⁠Harris Inflation Plan: Lowering Costs and Lowering the Deficit,” www.whitehouse.gov, May 10, 2022. 6“I Rented an Electric Car for a Four-Day Road Trip. I Spent More Time Charging It Than I Did Sleeping.” www.wsj.com, June 3, 2022.

This commentary is provided for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. Content has been obtained from third-party sources and is believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. The views expressed in this commentary are subject to change based on market and other conditions. The commentary may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.