Market Commentary — May 9, 2022

Stocks suffered their fifth straight week of losses as interest rate and inflation worries weighed heavily on market sentiment, hitting growth stocks particularly hard. The Dow joined the S&P 500 and S&P Midcap in correction territory, while the NASDAQ and Russell 2000 Smallcap indices sit firmly in bear territory, down more than 25%. Markets have been extremely volatile, although the VIX remains below intraday levels reached back in January.

The Fed raised interest rates by 50 bps as anticipated, and markets rallied for a few days last week on Chairman Powell’s comment that a 75 bps increase was off the table for June and his reassurances that a near-term recession was unlikely. But on Thursday, after a 3-day rally, investors reconsidered these comments given some worrisome inflation data.

The Commerce Department reported that nonfarm unit labor costs jumped 11.6% in the first quarter. This was well above the elevated consensus forecast for a rise of around 9.9% and was due largely to a 7.5% drop in productivity, the biggest quarterly decrease in nearly 75 years. Friday’s nonfarm payroll report came in in-line with expectations, adding 428k jobs in April, but there was encouragement that wages only rose 0.3% instead of March’s 0.5% figure.

Amid all this news, the 10-year Treasury breached 3% for the first time since 2018, climbing as high as 3.18% on Friday. The yield curve continued its recent steepening trend as long-term inflation expectations and long-maturity Treasury yields increased, as more investors ditched their bet that the yield curve would flatten.

According to FactSet, while the 87% percentage of S&P 500 companies beating EPS estimates YTD is above the five-year average of 77%, the magnitude of these positive surprises (4.9%) is below the five-year average level of 8.9%. This supports that higher costs are a problem for many companies, as revenues are above the 5-year average level.

The SEC approved yet another Bitcoin futures ETF, giving the green light to Valkyrie’s filing. Thursday’s sharp market reversal was brutal for many leveraged ETFs. In the 3 days through Wednesday, investors piled into TQQQ (the triple-levered version of the QQQ), only to see it tumble 15% on Thursday. Similarly $1.8 billion poured into High Yield (HYG), just in time for its worst day in two years. And the $600 million in new flows betting on ARKK, saw a slump of almost 9%, with the new 2X levered TARK version debuting down 18% its first week. One thing is for certain, investors who boldly took these risk-on bets, got wickedly whipsawed by last week’s quick market reversal.

Let’s see what investors, licking their wounds, do next week. Adding more fuel to the fire, inflation data will be the key focus with reports out from the US and China for April. There will be more Fed comments following the May Fed FOMC meeting, as well as US consumer sentiment data. China will release new trade data against the backdrop of lingering COVID-19 disruptions. And the UK’s March GDP data and eurozone industrial production figures are also lined up in the week ahead. And then, of course, there is the Russia and Ukraine situation and the devastating toll it is taking.

Hope all the moms out there had a wonderful Mother’s Day! Here are my M.O.M. acronyms: Master of Multitasking and Manager of Money. Sadly, as the kids are older, I am rarely the Maker of Meals these days. But so very lucky to be the MOM to three awesome humans named Melissa, Kyle & Caitlyn, and the daughter of my amazing mom, Jill.

Jane Edmondson
CEO and Co-Founder

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