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Bounce or Bottom? Stay Tuned!

The major market indices finished the holiday shortened week higher, with the S&P 500 snapping a three week losing streak.

June 27, 2022    |    By Michael Schwager

Performance for Week Ending 6.24.2022:

The Dow Jones Industrial Average (Dow) finished up 5.39%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 6.58%, the Standard & Poor’s 500 Index (S&P 500) gained 6.45% and the Nasdaq Composite Index (NASDAQ) tacked on 7.49%. Sector breadth was positive with 10 of the 11 S&P sector groups closing higher. The Consumer Discretionary sector (+8.25%) was the best performer followed by Healthcare (+8.15%) and Real Estate (+7.71%).

Index* Closing Price 6/24/2022 Percentage Change for Week Ending 6/24/2022 Year-to-Date Percentage Change Through 6/24/2022
Dow 31500.68 +5.39% -13.31%
Wilshire 5000 38930.58 +6.58% -19.67%
S&P 500 3911.74 +6.45% -17.93%
NASDAQ 11607.62 +7.49% -25.81%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 6/20/22 – 6/24/22

The major market indices finished the holiday shortened week higher, with the S&P 500 snapping a three week losing streak. Driving the gains was Fed Chair Jay Powell's reassurance to investors that the Fed will raise interest rates higher and fast enough to quell inflation, without tightening credit so much as to throttle the economy and cause a recession. Adding to the positive tone was the announcement from the Federal Reserve that all of the nation's largest banks could weather a severe shock to the U.S. economy in an assessment that will allow them to boost shareholder returns over the coming year. All 33 U.S.-based banks -- with more than $100 billion in assets -- passed the Fed's annual 'stress test', a report card put in place in the wake of the global financial crisis that probes a bank's ability to keep enough capital on hand to absorb losses -- and protect depositors -- in the event of a severe recession.

Powell on Capitol Hill: In his twice annual testimony to the House and Senate panels, Fed Chairman Powell said his commitment to curbing inflation is “unconditional.” Powell did however acknowledge that steep rate hikes could tip the U.S. economy into recession, saying one is possible and calling a soft landing “very challenging.” Powell added “the other risk, though, is that we would not manage to restore price stability and that we would allow this high inflation to get entrenched in the economy,” noting that- “we can’t fail on that task. We have to get back to 2% inflation.” Meanwhile, Fed Governor Michelle Bowman separately told a group of bankers in Massachusetts that she backed raising rates by 75 basis points next month and continuing with hikes of at least 50 basis points after that until price pressures cooled. Her comments followed a speech by Governor Christopher Waller last weekend in which he said that he would support another 75 basis point move in July. Other officials, including Minneapolis Fed President Neel Kashkari and Chicago’s Charles Evans -- who have previously been on the dovish wing of the U.S. central bank -- have also suggested that a move of that size was reasonable to debate next month.

Economic Data Remained Mixed: The Labor Department reported that initial jobless claims fell 2k last week to 229k, a shade above consensus expectations of 225k. The rise in claims pushed the four-week moving average up 5k to 224k. With noise related to the Memorial Day holiday behind, it looks like initial claims are finding a new floor of around 225k. That's above the Q1 average of 200k, but still at historically low levels. Meanwhile, U.S. business activity took a decisive step back in June as rapid inflation reduced demand for services and led to outright contractions in factory orders and production. The S&P Global flash June composite purchasing managers index (PMI) slid 2.4 points to 51.2. While still above 50, and therefore indicating growth, the reading was the second weakest since July 2020, when the economy was clawing its way out of a pandemic-induced recession. Existing home sales during May were in line with expectations, falling for a fourth consecutive month to a seasonally adjusted annual rate (SAAR) of 5.41mn, the slowest pace of sales since June of 2020. Inventory increased, but still remains tight, helping to push home prices to a record high of $407,600. On the flip-side, new home sales were much stronger than expected in May, increasing 10.7% to a SAAR of 697k and sales for April were revised higher. Solid increases in sales in the South and West – which combined account for close to 90% of new home sales – drove the increase. Inventory continued to increase while home prices edged lower. Despite the upside surprise in May, new home sales are likely to lose some momentum going forward as the sharp increase in mortgage rates takes a toll on homebuying affordability, pricing many buyers out of the market. Lastly, amid the rise in gasoline prices and ongoing inflation pressures that are eroding household incomes, the University of Michigan's consumer sentiment index declined 8.4 points to 50 this month, the weakest reading in the series 45-year history. While sentiment plunged, inflation expectations likely failed to ease the Fed's anxieties around inflation. One-year ahead inflation expectations were unchanged at 5.3% in June, but long run five-to-ten-year expectations rose 0.1 ppts to 3.1%. This is encouragingly lower than the 3.3% print in the preliminary reading, which was cited by Fed Chair Powell as “quite eye-catching” earlier this week, but 3.1% remains the highest expected long-run rate of the current cycle.

Tale of Two Halves? While the near-term outlook for the markets will remain clouded by the situation in Ukraine, elevated levels of inflation and concerns over the Federal Reserve’s response to inflation, we think as we move into the second half of the year things will begin to stabilize. The U.S. economy remains in relatively good shape and the probability of a recession in the coming quarters, while increasing, still remains low. Consumer balance sheets are strong with debt-to-income levels near record lows. Money market mutual have over $4.5 trillion in cash and corporate buyback activity is expected to remain strong. Supply chain issues have also started to ease. Importantly, the earnings environment remains solid with high single digit growth expect this year and next. If there has been a silver lining to the recent market weakness, it’s been that valuation levels have moved lower with the S&P selling for just over 15x the 2023 estimate and 14x the 2024 estimates. While still not a cheap market, valuation is well off levels seen in recent years.

The Week Ahead: The economic calendar in the week ahead will keep investors busy parsing the data to assess the trajectory of U.S. economic growth amid elevated recession fears. Among key June indicators will be the ISM Manufacturing Index on Friday, the Chicago PMI on Thursday and regional Fed's manufacturing indices throughout the week. How the consumer is faring under rising rates and stubborn inflation will be another key theme, with the Conference Board’s June Consumer Confidence Index out on Tuesday and May personal income and expenditures released on Thursday. The earnings calendar will begin to creep back into the picture with seven members of the S&P 500 scheduled to release quarterly results. The unofficial start of Q2 earnings will start during the week of July 11, when banking bellwether JP Morgan kicks things off-on Thursday of that week. The Fed speaking calendar will be minimal with 4 speaking engagements, including an appearance by Fed Chairman Powell on Wednesday. Trading activity is likely to lighten as the week progresses as attendance is expected to thin out ahead of the July 4 holiday weekend.

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.




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