Welcome to the weekly market update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this week.
We had a pretty good week in the market. After the 4% sell off last week, the market exhausted investor selling, recovering most of the 4% loss. Currently, the market is trading in a sideways yet volatile trading pattern.
In the news this week, it appears that we will finish the week with the first weekly gain since the month of March with the Dow, Nasdaq, and S&P all up at least 3.4% on the week. Gas prices continue to surge but demand for gas has slipped ahead of the typically travel heavy Memorial Day weekend. And traditional retailers had a nice set of earnings calls this week.
So far this year, selling pressure has not been isolated to stocks. Bonds have had one of the worst starts of the year in US history with the US aggregate bond index, shown in blue, down over 10%. Long term treasuries, shown in purple, have also had a tough year down over 15%. Typically, bonds tend to have negative correlations to stocks allowing diversified investors to bucket their assets so bonds show returns in high volatility environments and stocks show returns during low volatility. That has not been the case this year with both bonds and stocks selling off. However, it appears that selling trend may have reversed with a bottom established early May. Bond performance in this environment is mostly going to depend on two things: inflationary and recessionary fears. Bonds underperform in inflationary environments and outperform in recessionary environments.
For the month of April, inflation fears receded a bit with a slight drop in CPI growth including significant declines in energy prices as well as 3 straight months of used car price drops.
Likewise, five-year breakeven inflation appears to have peaked back in March and has been on a steady decline back to the 2-2.5% mean implying that we may have already reached peak inflation.
Thus, as inflation fears abate, bonds have started to rally as volatility begins to rise.
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1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved May 27, 2022, from FactSet Database.
2.FactSet Research Systems. (n.d.). US Agg & TLT (Interactive Charts)). Retrieved May 27, 2022, from FactSet Database.
3.Bureau of Labor Statistics, US Department of Labor. April 2022 Consumer Price Index. Released May 11, 2022. Retrieved from https://www.bls.gov/news.release/pdf/cpi.pdf
4.Federal Reserve Bank of St. Louis, 5-Year Breakeven Inflation Rate [T5YIE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/T5YIE, May 26, 2022.
5.FactSet Research Systems. (n.d.). US Agg & VIX (Interactive Charts)). Retrieved May 27, 2022, from FactSet Database.
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