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The Latest from Our Blog

Last Week, Bad News Was Good News.

Consumers were feeling blue in June, according to the University of Michigan Consumer Sentiment Survey. The survey scored sentiment at 50, which was the lowest level on record. Surveys of Consumers Director Joanne Hsu reported that 79 percent of consumers anticipate business conditions will decline during the next 12 months, and almost half indicated they are spending less because of inflation. Consumer pessimism was reflected in the S&P Global Flash US Composite PMI™. The Index measured that manufacturing growth was at the lowest level in almost two years. “Declines in production and new sales were driven by weak client demand, as inflation, material shortages, and delivery delays led some customers to pause or lower their purchases of goods,” reported S&P Global. The Index was at 52.4. Any reading above 50 indicates growth. Unhappy consumers and slower growth in manufacturing made investors very happy. Consumer spending drives the economy. So, if consumers begin to spend less and economic growth slows, then the Federal Reserve may slow its rate hikes or raise rates by less. Last week Fed Chair Jerome Powell told Congress:

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The Fight Against Inflation Intensified.

Last week, the Federal Reserve (Fed) delivered a message that it is serious about fighting inflation. The Federal Open Market Committee (FOMC) lifted the federal fund's target rate by 0.75 percentage points. The fed funds rate is now 1.50 percent to 1.75 percent. The Fed also has begun to shrink its $9 trillion balance sheet by selling Treasury securities and agency mortgage-backed securities, a process known as quantitative tightening (QT), reported Kate Duguid, Colby Smith, and Tommy Stubbington of Financial Times (FT). The Fed’s balance sheet expanded greatly during the past few years as it engaged in quantitative easing (QE). QE entailed buying Treasury and agency securities to ease financial conditions, strengthen the economy, and support markets during the pandemic.

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Inflation Is Proving to be Far More Tenacious Than Markets Had Hoped.

The idea that inflation peaked in March was put to rest last week when the Consumer Price Index (CPI) showed that inflation accelerated in May. Overall, prices were up 8.6 percent last month, an increase from April’s 8.3 percent. It was the highest inflation reading we’ve seen since December 1981. The most significant price increases were in energy (+34.6%) and food (+10.1%). That’s unfortunate because the War in Ukraine significantly influences food and energy prices right now, and no one knows how long it will last. In April, the World Bank’s Commodity Markets Outlook reported: “The war in Ukraine has been a major shock to global commodity markets. The supply of several commodities has been disrupted, leading to sharply higher prices, particularly for energy [natural gas, coal, crude oil], fertilizers, and some grains [wheat, barley, and corn].”

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How Strong Is the United States Economy?

That’s the question investors were mulling after last week’s jobs report. More jobs were created in May than economists expected, and the labor force participation rate rose, meaning even more people are returning to work. Overall, the unemployment rate remained at 3.6 percent. However, unemployment rates varied by age, sex and race: Adult men: 3.4 percent Adult women: 3.4 percent Asian: 2.4 percent Black: 6.2 percent Hispanic: 4.3 percent White: 3.2 percent Teenagers: 10.4 percent From an inflation perspective, there was some good news in the employment report as earnings increased at a slower pace than in previous months. Apart from that bit of good news, “More jobs added and higher wages are signs of a strong economy…the concern is that inflation will remain close to its recent peak,” reported Joel Woelfel and Jacob Sonenshine of Barron’s.

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Investors Reassessed and Markets Bounced.

Last week, major U.S. stock indices moved higher for the first time in weeks. The Dow Jones Industrial Average gained 6.2 percent, the Standard & Poor’s 500 Index was up 6.6 percent, and the Nasdaq Composite rose 6.9 percent, reported Ben Levisohn of Barron’s. The change in investor attitude may have been influenced by a variety of factors, including: Strong corporate earnings (profits). Not only were U.S. companies profitable during the first three months of this year, but company leaders and market analysts also anticipate they will remain profitable throughout 2022. Ninety-seven percent of the companies in the S&P 500 have reported earnings so far, and the blended earnings growth rate is 9.2 percent. Over the full year, analysts anticipate profits will increase by 10.1 percent, reported John Butters of FactSet.

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Living With a Bear

In the survival series “Alone,” the tension ratchets higher whenever participants encounter bears. Some participants live warily alongside bears, while others tap out. A similar thing happens among investors when they encounter a bear market. What is a bear market? People define bear markets in different ways. Some people say a share price decline of 20 percent is bear market territory. Last week, the Standard & Poor’s (S&P) 500 Index was down 19.6 percent before Friday’s rally, according to Ben Levisohn of Barron’s, and the Nasdaq Composite was already down more than 20 percent. Other people say a bear market occurs when more investors are bearish than bullish. That’s certainly the case today. The Association of Independent Investors’ Consumer Sentiment Index found 49 percent of investors were bearish and 24 percent were bullish last week. Other sentiment indicators, including the Consensus Bullish Sentiment Index cited by Barron’s, also show that investors and investment professionals are feeling more bearish than bullish.

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