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Weekly Market Recap

Weekly Recap:

Stocks drifted lower for most of last week on higher-than-expected inflation data and disappointing bank earnings, only to rally sharply on Friday following encouraging prints from several important econometric data points.

Consumer (CPI) and Producer (PPI) inflation data both painted a similar picture of the ongoing divergence between headline and core inflation. Headline inflation continues to rise, driven by soaring food and energy costs. Meanwhile, core inflation has moderated over the past few months and appears to have already peaked.

Headline CPI reached 9.1% on a y/y basis in June, the highest such print in the US in more than 40 years. See the Chart of the Week for a time series.

Despite these inflation headwinds, market participants were encouraged by a slew of positive economic data points released on Friday:

  • Empire Manufacturing surged back to expansion territory at 11.1 for July
  • Retail sales ex auto and gas was +0.7% in June, beating the +0.1% consensus
  • Import prices ex petroleum fell by 0.4% in June
  • U. of Michigan Consumer Sentiment rose to 51.1 in July, beating consensus of 50.0
  • U. of Michigan 5-10 yr Inflation Expectations fell by 30bp to 2.8%

In the end, stocks finished modestly lower on the week, while bonds rallied. The inversion of the 2s10s yield curve deepened following the inflation print. Oil prices fell, while US gasoline prices continued to ease lower as well.

July 15, 2022 – Chart of the Week – Headline & Core CPI

Economy & Earnings

Annualized US GDP growth fell to -1.6% in Q1 on headwinds from trade, private investment, and government spending. Real time data suggest Q2 GDP growth will be lower than the current consensus of +2.4%. Meanwhile, corporate operating margins remained robust in Q1, but many companies have warned that inflation will pressure margins in Q2 and beyond.

Valuation

The S&P 500’s forward P/E of 16x is slightly above the long run average, and more predictive valuation metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the single digits. That said, many growth stock P/E’s have reached multi-year lows, suggesting future returns in some sectors could be above average.

Interest Rates

Rates have risen across the curve in 2022 in response to a shift in monetary policy. Fed Fund Futures markets are pricing in a total of 14 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 3.50% by year end.

Inflation

Inflation is at 40yr highs as supply chain disruptions, labor shortages, and rising energy prices have impacted input costs for many businesses. The Fed has begun raising overnight interest rates in order to tame inflationary pressures.