Inflation or Recession? May 20 Market Recap

Inflation or Recession? May 20 Market Recap

Inflation or Recession? 

Indices 

Dow 31,261 (935) or (2.9%) 

Nasdaq 11,354 (451) or (3.8%) 

S&P 3,901 (122) or (3.1%) 

USD10Y 2.787% (14.8bp) or (5.0%) 

S&P Falls into Bear Market Territory 

Unlike last week when the S&P traded down to begin Friday’s session and stopped just shy of bear market territory, this Friday the index traded down more than 20% from its all-time high, rallied to finish flat on the day but still finished the week down over 3%. Market observers disagree as to whether hitting the bear market level intraday marks an official bear market or whether the index must close at those levels to be considered such. However, one thing that we can all agree on is that the fall has been considerable and painful. 

Inflation or Recession? 

Considering the first two days of the trading week were solidly higher after Tuesday’s session, it appeared that investors had swallowed the Fed’s tough love rate hike message and were beginning to shop for deals. That ended abruptly Tuesday after the close when Walmart (WMT) beat revenues but missed their earnings estimates by a substantial margin. Wednesday morning, the other shoe dropped when Target (TGT) missed their earnings expectations. This in turn caused a full-blown panic in the retail space (Consumer Discretionary and Staples down 7.4% and 8.6% respectively for the week) with fears that the consumer is tapping out. Putting aside for a moment the fact that both retail giants beat their revenue expectations, both cited rising costs for missing their earnings numbers, and that TGT reiterated their full year guidance, this bears watching as economic data is beginning to demonstrate that the Fed’s actions are having their desired effect… 

• Philly and Empire State Manufacturing printed well below expectations. 
• April Retail sales missed expectations. 
• April Existing Home Sales missed expectations. 
• Jobless Claims have missed expectations over the last six weeks and have been climbing over the last four (WMT claimed overstaffing was partially responsible for their earnings miss). 

Friday will reveal an important data point with the PCE inflator print. If the number comes in above or even at expectations, expect the Fed to continue 50bp rate hikes past the July meeting. However, if the number demonstrates that inflation is moderating, considering the economic data and further retail earnings reports the market will digest this week, the Fed may find cover behind which they can pause their rate hikes and revert to their data dependent strategy. 

Covid Update 

For the fourth consecutive week, infections grew by more than 52% and have crested the 100k/day new case rate. Hospitalizations are up 20% or more for the third consecutive week. Deaths, after flattening out over the last several weeks, have ticked down again. 

Covid 14-Day Daily Moving Averages 

Next Week 

The two big events next week will be Wednesday’s release of the FOMC minutes from their meeting earlier this month and the Core PCE inflator number on Friday. Keep an eye on Initial Jobless Claims on Thursday to see if the trend of rising claims continues. More retail earnings reports from Macy’s, Best Buy, and Costco will most likely confirm the Walmart and Target stories from this week; that the consumer, while still spending, has shifted away from larger ticket, discretionary purchases. 

Market Data Points Next Week 

• Monday – Earnings: Zoom (ZOOM). 
• Tuesday – May Flash S&P Global Manufacturing and Services PMI. April New Home Sales. Earnings: Best Buy (BBY) 
• Wednesday – FOMC minutes. April Durable Goods Orders. Earnings: Nvidia (NVDA). 
• Thursday – Initial Jobless Claims. Q1 GDP. Earnings: Macy’s (M), Costco (COST). 
• Friday – Core PCE Inflator. 

May 20 Market Recap Trading… 

Monday – Dow +26 to 32,223, Nasdaq (142) to 11,662, S&P (15) to 4,008, USD10Y (4.8bp) to 2.887% 

• May Empire Estate Manufacturing plummeted to –11.6 vs +16.5 expected and +24.6 in April. This is the second negative reading in three months.  
• WTI Crude jumped to settle at $114.04. 
• McDonald’s announced it would sell all its Russian operations after 30 years in the country. 

Tuesday – Dow +431 to 32,654, Nasdaq +321 to 11,984, S&P +80 to 4,088, USD10Y +9.1bp to 2.968% 

• Ten of the eleven S&P sectors traded higher today, led by Technology, Materials, and Financials. Only Consumer Staples traded in the red today. 
• April Retail Sales missed slightly at +0.9% vs expectations of a +1.0% gain. However, March Retail Sales were revised by double to +1.4% vs the original +0.7% print. 
• Earnings: Walmart (WMT) beat revenues but missed their earnings estimates by a substantial margin due to higher costs, higher levels of inventory, and overstaffing. WMT traded down 11%. Home Depot (HD) crushed their numbers and guided 2022 expectations higher. HD traded up 1.68%. 

 Wednesday – Dow (1165) to 31,490, Nasdaq (566) to 11,418, S&P (165) to 3,923, USD10Y (8.2bp) to 2.886%. 

• All eleven S&P sectors traded down today led lower by Consumer Discretionary, Consumer Staples, and Technology. 
• Earnings: Target (TGT) beat revenue expectations but missed earnings expectations, citing higher fuel costs, supply chain issues, and lower than expected sales of discretionary merchandise. Even though TGT reiterated 2022 guidance, the stock still traded down 25%. Lowe’s (LOW) missed revenues but beat on earnings, reiterated full year guidance and traded down 5%. TJX Companies (TJX) beat expectations and climbed 7.2%. 
• WTI Crude fell over $5/bbl on global economic slowdown fears to settle at $110.02/bbl. 

 Thursday – Dow (236) to 31,253, Nasdaq (29) to 11,388, S&P (22) to 3,900, USD10Y (3.1bp) to 2.855% 

• Eight of eleven S&P sectors traded down today led lower by Consumer Staples, Technology, and Industrials. 
• Jobless claims were higher than expected at 218,000 claims vs 200,000 expected and last week’s slightly revised lower 197,000 print (originally reported as 203,000 claims). Continuing claims continued to decrease from 1.34 million to 1.32 million. While continuing claims trend lower, the opposite has been true for initial jobless claims. Today marks five out of the last six weeks that the print has exceeded expectations. April 14’s print was 185k claims and other than April 28th’s print which was inline, the other five weeks have missed expectations have grown from a low of 180k (April 21) to today’s print of 218,000. Is the labor market starting tighten? 
• June WTI Crude traded up slightly to $111.44/bbl.  
• May Philly Fed Manufacturing was not much better than Empire State with a 2.6 print vs 15 expected and vs last month’s 17.6 number. 
• April Existing Home Sales posted a 5.61 million number vs 5.64 million expected and March’s 5.75 million. 

 Friday – Dow +9 to 31,261, Nasdaq (33) to 11,354, S&P +1 to 3,901, USD10Y (6.9bp) to 2.787% 

• Six of eleven S&P sectors traded higher today led by Health Care, Real Estate, and Energy. 
• June WTI Crude closed at $112.70/bbl.  
• Ross Stores (ROST) continued the tough week for retail, missing both earnings and revenue expectations and slashing forward guidance as well. ROST traded down 22.5%. 

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Disclaimer: This is not a recommendation to buy or sell any of the securities listed above. I personally, or a family member whose account I control, have positions in the following securities/assets…Bitcoin, Cardano, Chainlink, Ethereum, ETHE, GBTC, and TSLA.