Monday Morning Market Insights: Last Week in Review with Rusty Vanneman, Vol. 19
It was another fascinating week in the economy and markets last week. As for the overall stock market, despite a mid-week swoon (at one point the market was down 4% for the week), in the end it lost just over 1%. One asset class that did have gains last week were commodities (Morningstar Commodity Index +2.1%).
The overall U.S. market is now down for the month of May (less than 1%), but still up nearly 5% for the quarter and up nearly 11% for the new year.
There has been notable dispersion in returns within the market though, with the asset classes that should perform better in an inflationary environment (such as commodities, value stocks) outperforming. Speaking of dispersion, did you know that the Technology sector has now underperformed the S&P over the last year? Hard to believe. Related to the last point, last week was also the 3-month anniversary (Feb 12) when the most high flying stocks and ETFs in the market (think like ARK funds) peaked in relative performance terms.
One driver of recent relative performance is the concern about inflation. Inflation indeed remains a top headline in the financial press and a leading question among investors. Plenty of sensational headlines last week including both Consumer Price Index (CPI) and Producer Price Index (PPI) both coming in above expectations. Some of the more notable headlines were PPI up 6.2% year-over-year – its highest level in more than a decade! CPI up an annualized 7.2% over the last three months. Core CPI prices rose in April at the largest monthly rate since 1982.
For some potential Orion Portfolio Solutions strategy ideas to fight inflation, check out this recent Portfolio Recipes webinar.
Given the inflation news, it wasn’t a surprise that interest rates rose last week. Yet, the 10-year Treasury only rose from 1.60% to 1.63% last week (hitting a closing high yield of 1.69 mid-week). This is still below the high of 1.74% from March. If you ask me, given the growth/inflation news, interest rates have been well behaved this year. Corporate bond yields have too – both of these are big pluses for the stock market.
One “inflation-fighter”, however, is a having a tougher time. Cryptocurrencies have been on the slide, with Bitcoin even dropping nearly a third off its all-time highs earlier this year.
Breaking Down Breadth
One current market positive, in my opinion, is market “breadth.” In short, it’s a good sign for the market when gains are broad-based and not just concentrated in relatively few names. Well, one could say that is what we have this year. The market is up 11% while the average stock is up 19%. So far, so good.
Here is where the concept of breadth this year gets a little weird though. There are a couple key market indices to look at. First, the NASDAQ index does not show good breadth. That shouldn’t be a surprise given the aforementioned tech sector’s relative weakness. The second index, however, is the Russell 2000, which is a benchmark for small cap stocks. Usually, when breadth in the market is strong, small caps are performing well. This isn’t happening now.
In fact, over the last 3 months, small caps are only up 2% while the overall market is up 4%. What should be noted, however, is that small cap value is up about 19% during that time frame! So, this brings us back to the prior point that the most high flying small cap growth names “broke” 3 months ago, while companies levered to positive economic growth (and inflation) are still performing quite well. Add it all up, I believe one could still count breadth and “don’t fight the tape” as bullish signals for the stock market.
Bottom line, given the improving economy, and massive government support for the economy and markets, the outlook still appears bright. Nonetheless, diversifying broadly is still wise counsel.
Earnings & Economic Data
Earnings season is almost over. Over 90% of the S&P 500 has reported and 86% have reported positive earnings. Earnings growth is over 50% for the quarter. Next quarter is expected to be ever better – estimated earnings growth of over 60%.
Last week was loaded with economic data. This week, not so much. Housing data will get the most attention this week. The Federal Reserve does release some minutes from their prior meeting Wednesday, which might give some clues on future interest rate policies. I’m not expecting much.
For more resources on the economy and markets, including Partner content, please review the Orion Portfolio Solutions Financial Advisor Success Hub.
As always, please let me know if you have any feedback or questions. You can reach me by emailing firstname.lastname@example.org.
Have a great week!
The CFA is a globally respected, graduate-level investment credential established in 1962 and awarded by CFA Institute — the largest global association of investment professionals. To learn more about the CFA charter, visit www.cfainstitute.org.
The CMT Program demonstrates mastery of a core body of knowledge of investment risk in portfolio management. The Chartered Market Technician® (CMT) designation marks the highest education within the discipline and is the preeminent designation for practitioners of technical analysis worldwide. To learn more about the CMT, visit https://cmtassociation.org/.