Except for the TSX, North American equity markets continued the slide lower for another week on fears of a coming recession caused by inflation slowing consumer spending. The TSX ended the week 50 basis points higher, whereas the US market indices fell lower, led by the Nasdaq falling 3.82%. The S&P 500 dropped 3.05%, the Dow lost 2.90%, the mid-cap S&P 400 fared better, losing only 1.89%, and the Russell 2000 1.08%. Markets were rattled by earnings reports from retail giants Walmart and Target, with both companies reporting lower-than-expected operating margins. Higher fuel and freight costs reduced margins and, in general, continue to challenge the retail and manufacturing sectors. The Pan-Europe STOXX Europe 600 Index lost 0.55%, Germany’s DAX Index lost 0.33%, France’s CAC 40 Index slipped 1.22%, and the UK’s FTSE 100 drifted 0.24% lower. European investors, like US investors, are growing more concerned about growth prospects, rising rates and inflation.
Last Monday, May’s Empire State Manufacturing Survey diffusion index for business conditions dropped 36.2 points from the previous month to -11.6. Any number below 0.0 indicates worsening business conditions. Economists polled by the Wall Street Journal expected only a modest decline to 16.5. Components of the index showed weakness, with the new-orders index falling to -8.8, dropping 33.9 points from April’s reading, and the shipments index cascading 49.9 points to -15.4. Unfilled orders and May delivery times fell but remained positive at 2.6 and 20.2, respectively.1
Last Tuesday, the US Census Bureau reported its estimates for US retail and foodservice sales for April, increasing by 0.9%. March was revised higher to 1.4%.2 Also last Tuesday, the Federal Reserve reported US industrial production rose 1.1% in April for the fourth monthly gain of more than 0.8%. April’s capacity utilization rose to 79% from 78.2%. Manufacturing rose 0.8%, and component increases were broad based.3
Comments by Fed Chair Jerome Powell confirm the Fed’s commitment to reducing inflation when he said, “What we need to see is inflation coming down in a clear and convincing way, and we’re going to keep pushing until we see that.” Contributing to signs of a potentially slowing economy, building starts slipped slightly by 0.2% to an annualized pace of 1.72 million, and building permits declined by 3.2% to 1.82 million.4 Initial claims for unemployment benefits increased to 218,000, up 21,000 from the previous week; however, benefits from all programs for the week ending April 30 fell 68,885 to 1,373,448 from the previous week.5 The US Leading Index (a weighted gauge of 10 indicators) fell in April by 0.3%. The main driver of the decline was attributed to lower home-building and a drop in consumer confidence.
With the US economy showing signs of growth, however modest, several market strategists are calling for a rally this summer as the valuation of equities has become more attractive considering the latest decline. One negative could be the magnitude of rate increases by the Federal Reserve to control inflation. Rate increases this time will not have the intended impact because the critical components of inflation pressing higher are food and energy, which are not being driven by liquidity but by shortages. Shortages are not going to be controlled by higher interest rates. It is doubtful the Federal Reserve will be able to orchestrate the “soft landing” it desires.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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