Sightline Weekly Market Update: Inflation Concerns Drive Down Consumer Sentiment Readings
Equity markets struggled through another week, ending lower for the seventh week in a row for the Dow and the sixth week in a row for the S&P 500 and the Nasdaq. The primary worry for investors is whether the Fed can successfully orchestrate a soft landing by raising rates enough to reduce inflation without causing a recession. Topping the list of concerns is inflation, slowing growth, the pace of Fed interest rate tightening, the Ukrainian situation, and supply chain disruptions caused by lockdowns in China.
The big loser in the week was the Nasdaq, dropping 2.8% and pushing the year-to-date return further into bear market territory, down 24.54%, followed by the TSX index falling 2.6%, the Russell 2000 index losing 2.55, the S&P 500 index losing 2.4%, and the S&P400 MidCap index falling 2.02%. European equity indices bucked the North American trend to close the week higher. The pan-European STOXX Europe 600 Index managed a gain of .83%. The German DAX Index increased by 2.59%, the Italian FTSE MIB Index gained 2.44%, and the French CAC 40 Index gained 1.67%. The UK FTSE 100 index added .41% in the week.
Last Tuesday, the NFIB Small Business Optimism Index reported the confidence among small business owners remained unchanged in April at 93.2 after falling for three consecutive months. Economists polled by the Wall Street Journal expected a drop to 92.9. Despite business owners’ pessimistic outlook for sales and business conditions, the number of owners expecting an increase in sales over the short-term increased slightly. In April, the number of owners expecting better business conditions in the next six months declined. Despite offering higher wages, forty-seven percent of the respondents continue to struggle to find and maintain staff.1
On Wednesday, the Labor Department released its latest inflation data. Inflation (CPI) slowed in April for the first time in 5 months to an annualized rate of 8.3%, down from 8.5% in March. Economists had expected an 8.1% reading for April. Core inflation, inflation ex-food and energy, rose 0.6% over the March reading when economists predicted a 0.4% increase. With inflation running “hot,” Fed Chairman Jerome Powell has previously stated that the central bank would likely raise rates at the next meeting, and President Biden has said that inflation is his top domestic priority.2
On Thursday, the Bureau of Labor Statistics (BLS) reported that producer prices at the wholesale level rose 0.5% in April, up 11% from a year ago but down from 11.5% in March. Excluding food, energy and trade services, the core PPI rose 0.6% in April, up 6.9% from a year ago and 7.1% in March. Two indices sectors tracking gas and groceries were up 1.7% and 1.5% in April.3 Also, on Thursday, the BLS reported initial jobless claims increased by 1,000 to 203,000 for the week ending May 7. Continuing claims for all benefits fell by 44,000 to the lowest level since 1970.4
Finally, on Friday, the University of Michigan released the latest sentiment reading falling to 59.1 from 65.2 in April. The Bloomberg survey of economists expected a 64 reading. The declines in sentiment were broad-based on current economic conditions and consumer expectations. Declines were similar for all age groups, income levels, education, geography and political affiliation. Consumers assessing current financial situation versus a year ago is at the lowest reading since 2013. Buying conditions for durable goods (goods that last longer than one year) are at the lowest reading since the question was first posed in 1978. Inflation was the cause of low readings for financial and buying conditions.5
Equity markets will continue to be volatile until there is clarity on several investor concerns. Valuations are more attractive than they were, but only if earnings remain supportive. If the Fed can deliver a “soft landing,” the market could see a rebound.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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