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Dow falls for 7th straight week as inflation data remains hot

The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently. – John Bogle

Stocks continued their downward slide last week as the Dow Jones Industrial Average posted its first 7-week losing streak since 2001 while the S&P 500 Index recorded its longest weekly losing streak since 2011. To add insult to injury, the technology-laden Nasdaq Composite Index was the biggest loser with a decline of nearly 3% and closed lower for the 6th consecutive week. Needless to say, the selling has been relentless as investors remain fearful of high inflation, rising interest rates and the potential for an economic slowdown. Last week’s economic data didn’t help ease investors’ concerns, either, as both the consumer price index (CPI) and the producer price index (PPI) in April were still running much too hot. The CPI rose 8.3% year-over-year, slightly lower than in March but higher than estimates and near the highest level in more than 40 years. The core CPI, which excludes food and energy prices, also was higher than expected. Even though average hourly earnings have risen 5.5% over the past year, real earnings have fallen 2.6% due to the elevated inflation levels. Another concern is the rising cost of housing, which is about one-third of the consumer price index weighting. The troubling inflation data was enough to spook the bond market, too, as the 10-year Treasury yield hit 3.08% before ending the week at 2.93%. Although the stock market rebounded strongly on Friday after dovish remarks by Federal Reserve Chairman Jerome Powell that the Fed would be sensitive to economic growth when raising interest rates, it’s difficult to know whether or not the market has put in a bottom. One of the few bullish signs for the stock market is that everyone is so bearish, which is often viewed as a contrarian signal. While the market volatility is likely to continue, it’s important to note that U.S. stocks have historically performed well when the Fed is raising rates. In fact, the stock market has posted an average annual return of 9% in the 12 rate-hike cycles since the 1950s.

Last Week

The producer price index (PPI) in April rose 11% year-over-year, in line with estimates but still way too high. Weekly jobless claims totaled 203,000, an increase of 1,000 from the previous week and above estimates of 194,000. The University of Michigan consumer sentiment index in May fell to an 11-year low as consumers struggle with soaring inflation.

For the week, the Dow Jones Industrial Average fell 2.1% to close at 32,196 while the S&P 500 Index lost 2.4% to close at 4,023. The Nasdaq Composite Index dropped 2.8% to close at 11,805.

This Week

April retail sales are expected to increase moderately and approximate last month’s gains while April leading economic indicators are expected to be flat after a slight gain in March. Gross domestic product (GDP) is forecast to grow about 3% for the year. Housing starts in April are expected to be slightly lower than in March while existing home sales are forecast to fall for the third straight month.

The most notable companies that are scheduled to report quarterly earnings this week are Walmart, Target, Home Depot, Lowe’s, TJX Cos., Kohl’s, Ross Stores, V.F. Corp., Analog Devices, Cisco Systems, Applied Materials, Palo Alto Networks and Deere.

Portfolio Strategy

With the Nasdaq Composite Index in bear market territory and the S&P 500 Index approaching it after last week’s losses, the stock market is extremely oversold as investor sentiment continues to be negative.  In times of volatility like we’re experiencing now, timing the market may seem tempting as a way of avoiding corrections and, even worse, bear markets. Unfortunately, trying to time the market has proven to be impossible and could be a costly mistake. Most investors who attempt to time the market rely on emotion and worry whether stocks have risen high enough to sell or have fallen low enough to buy. Market moves can be based on fear and greed and it is this emotional decision-making that adds uncertainty and makes the stock market irrational. To be successful at timing the market, an investor has to be right twice; first, knowing when to buy at a low point in the market and second, knowing when to sell at a high point in the market before it falls. This is extremely difficult to accomplish as even the so-called experts such as economists and investment strategists can’t predict when recessions and corrections will occur. If professionals such as these can’t successfully forecast the market, then the average investor certainly cannot. By sitting on the sidelines out of the market, investors miss out on income provided by dividends, which historically has accounted for over 40% of the total return of the S&P 500 Index. Many of the stock market’s best days have also occurred during bear markets or the first two months of a bull market. An investor who missed the stock market’s 10 best days over the past 30 years would have seen his returns cut in half. While times like these are always difficult and fraught with anxiety, it helps to keep calm and not make any dramatic, emotion-filled decisions. After all, what’s important is time in the market and not timing the market.