There will be bear markets about twice every 10 years and recessions about twice every 10 or 12 years but nobody has been able to predict them reliably. So the best thing to do is to buy when shares are thoroughly depressed and that means when other people are selling. – John Templeton
After experiencing its longest losing streak since 1923, the Dow Jones Industrial Average finally posted a positive week with a gain of 6.2% while the S&P 500 Index and the Nasdaq Composite Index snapped their seven-week losing streaks with gains of 6.6% and 6.8%, respectively. The strong showing by the major stock averages was attributed to perceived dovish minutes from the Federal Open Market Committee (FOMC), moderating inflation data and retail earnings that were mostly better than expected. While the Fed minutes acknowledged that there would be half-point rate increases in June and July, it left open the possibility of smaller rate hikes or even no rate hikes after that depending on the economic data. Fed officials were hopeful that they could bring down the inflation rate but said that the war in Ukraine and the Covid lockdowns in China would hamper their efforts. Nevertheless, the Fed was adamant about its intention to reduce inflation, including its plan to wind down its $9 trillion balance sheet consisting of Treasury securities and mortgage-backed securities. Investors also received some good news from the Fed’s preferred measure of inflation, the personal consumption expenditures (PCE) index. Although the April core PCE index, which excludes food and energy prices, rose 4.9% from a year ago, it was less than in the previous two months, suggesting that inflation may have peaked and is headed lower. The week wasn’t without volatility, though, as social media company Snap badly missed earnings and revenue targets on Tuesday and brought the technology-heavy Nasdaq Composite Index down with it as investors feared there would be a slowdown in digital advertising. However, earnings from retailers such as Macy’s, Dick’s Sporting Goods, Nordstrom, Dollar Tree and Dollar General were stronger than expected and the stock market rallied to end the week as the Dow rose for a sixth straight session, it longest winning streak since last year.
The second estimate of first quarter GDP was revised to a decrease of 1.5% from 1.4% and April durable goods orders rose modestly and were less than expected as the supply chain crisis worsened and weighed on business sentiment. Sales of new homes plunged in April to the slowest rate since the start of the Covid pandemic and were well below expectations as consumers are being hit by rising interest rates and high inflation, making it difficult for them to afford today’s higher home prices. Weekly jobless claims fell 8,000 to 210,000, compared to the forecast of 215,000, as the labor market remains tight amid strong demand for workers despite rising interest rates and tightening financial conditions.
For the week, the Dow Jones Industrial Average climbed 6.2% to close at 33,212 while the S&P 500 Index jumped 6.6% to close at 4,158. The Nasdaq Composite Index surged 6.8% to close at 12,131.
The employment report for May is expected to show that about 315,000 new jobs were created and that the unemployment rate edged lower to 3.5% from 3.6%. Both the ISM Manufacturing and Services Purchasing Managers’ Indexes (PMI) for May are expected to approximate those in April and indicate continued healthy expansion. The consumer confidence index for May is forecast to drop to its lowest level since February 2021, but the decline has not affected retail spending, which remains strong.
Among the most notable companies scheduled to report their quarterly earnings this week are HP Inc., Hewlett Packard Enterprises, Broadcom, Ciena, Crowdstrike, Gamestop, Hormel Foods and Lululemon Athletica.
After snapping a losing streak that reached eight consecutive weeks, the Dow Jones Industrial Average will be looking to build on that momentum this week. With the first quarter earnings season winding down, investors will likely focus on the May employment report due to be released on Friday. While the jobs number is forecast to be less than in April, it still should exceed 300,000 with the possibility that prior month’s data could also be revised higher. The stock market received a boost last week from the Federal Reserve minutes as they showed that Fed officials were not any more hawkish than anticipated. The odds that the federal funds rate will hit 3.00% by year-end dropped substantially as investors bet that the Fed will be less aggressive in its monetary policy tightening. The personal consumption expenditures (PCE) index in April was also slightly lower, indicating that inflation was not getting worse. The good news was reflected in bond yields, too. The yield on the 10-year Treasury declined to 2.74% while the 2-year Treasury yield fell to 2.47%. (Bond prices and yields move in opposite directions). This drop in bond yields certainly benefitted technology stocks and other growth stocks as the Nasdaq Composite Index surged nearly 7% last week after being mired in a bear market. Markets had become extremely oversold as the sell-off in stocks approached its sixth month and a relief rally was long overdue. Whether or not stocks have put in a bottom is anybody’s guess as the market could revisit its lows in the weeks ahead. Risks such as the Russia-Ukraine war, supply chain disruptions, effects of lockdowns in China and Federal Reserve interest rate hikes to combat high inflation have not gone away and could be with us for a while. Investors hate uncertainty and right now there seems to be no answer as to what effect this high inflation will have on the economy.