Market Week: May 16, 2022

The week in review

  • Headline and Core CPI rose 0.3% m/m and 0.6% m/m
  • Consumer sentiment fell to 59.1 from 65.2

The week ahead

  • Retail Sales
  • Housing Starts
  • Industrial Production

Thought of the week

Last week, investors’ hopes for signs of cooling U.S. inflation were dashed as the April CPI report showed inflation still running hot. High inflation is clearly weighing on consumer confidence and offers little hope that the Fed will deviate from its projected aggressive path of rate hikes. Both headline CPI and core CPI came in above expectations at 0.3% m/m and 0.6% m/m, respectively. While declines in energy prices led a moderation in headline CPI, core inflation accelerated as airfares, new vehicle prices and shelter costs rose solidly. Consumer sentiment also fell to a new 11- year low as persistent inflation and weakness in equity markets likely hurt confidence.

In response to these economic releases, markets saw another volatile week in what has already been a particularly volatile year. Higher interest rates, the war in Ukraine and persistent inflation have spared few asset classes from the sell-off, and while bonds typically provide ballast when equities head downward, a benchmark 60/40 stock-bond portfolio is down 14% year-to-date. It will likely take several inflation reports to determine whether prices are cooling enough for the Fed to dial back on tightening, and thus calm investor worries. However, while market volatility may continue, the sell-off has brought stock valuations down to much more reasonable levels, as shown in the chart, while earnings estimates have remained resilient. Further, history suggests that periods of gloom may be among the best times to buy equities. Indeed, following 8 rather obvious troughs in consumer sentiment over the last 50 years, subsequent 12-month S&P 500 returns averaged almost 25%. Because of this, investors would be wise to keep their emotions in check, and invest based on the logic of current valuations and long-term prospects, rather than negative emotion in this difficult time.

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