Market Commentary — May 23, 2022

The S&P 500 Index fell into bear market territory last week, down roughly 20.9% from its January intraday high, on concerns that inflation was curbing consumer spending. Several large brick-and-mortar retailers such as Walmart, Target, Lowe’s, and Home Depot all reported results shy of expectations. The hit to profit margins due to higher labor and input costs, as investors worried that major retailers would be forced to pass these costs on to customers in coming months, keeping inflation levels elevated. There are even rumors that Costco might raise the price of its signature cafe hot dog.

Chairman Powell told The Wall Street Journal that taming inflation was an “unconditional need” and that policymakers wouldn’t hesitate to raise rates as much as necessary, even if it meant “some pain [was] involved.” Economic data offered mixed signals as to whether a recession was on the horizon. Retail sales ex volatile autos rose more than expected in April (+0.6%) and March’s gain was revised upward to 2.1%. April industrial production, manufacturing production, and capacity utilization figures also surprised to the upside.

But on Thursday, a gauge of manufacturing activity in the Mid-Atlantic region missed by a wide margin, and weekly jobless claims rose more than expected. Housing starts and existing home sales also came in lower than expected, thanks to higher mortgage rates.

The yield on the 10-year fell as low as 2.77% on Thursday, its lowest level in nearly a month. Is the economy teetering toward recession? There is a great note from LPL research on “Six Things to Know About Bear Markets”. Most importantly, LPL’s Ryan Detrick thinks we will avoid recession. He also notes that the market has been down six weeks in a row, the longest losing streak since 2011. It hasn’t been down seven weeks in a row since 2001. That could bode well for future market action.

In ETF news, according to data provider FactSet, the 290 U.S.-listed ETFs thematic ETFs have posted losses of 12.78% in the last month and have lost 21.49% year to date. To make matters worse, nearly half of thematic ETFs are recent launches, with 36 thematic funds launched in the U.S. this year, and 111 launched in the bull market of 2021. This is likely to slow down the tide of new thematics to market and weed out poor-quality products. Many “me too” products will also likely be under pressure as too late to the party.

There is a saying that imitation is the sincerest form of flattery, but in the ETF industry that equates to less innovation and lower margins.

Have a great week ahead and here’s hoping markets buck their losing streak!

Jane Edmondson
CEO and Co-Founder

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