ECONOMIC REVIEW
- Inflation as measured by the Consumer Price Index (CPI) increased more than expected through May. Headline prices, including food and energy, rose by 1.0%, while core prices, which exclude those volatile categories, rose by 0.6%.
o Headline inflation is up 8.6% since this time last year; core prices are up 6% over the same period.
How does this impact you?
- Impact of the Consumer Price Index
- Inflation continues to run hot as the immense amount of monetary stimulus injected in the system further roils markets. While quantitative easing has since flipped to quantitative tightening, current policy remains substantially looser that either the Fed would like, or economic conditions dictate.
- The spike in headline CPI comes as no surprise for keen market participants tracking solidly elevated food and energy prices, which have shown little sign of easing.
- Moving forward, monitoring rents, or more specifically owner’s equivalent rent – measuring the price it would cost a homeowner to pay if they were to rent their home, will be extremely important.
- This portion of CPI makes up nearly 30% of the index, and the Fed can most easily and directly impact the housing market in its efforts to alleviate inflationary pressures.
With another Fed meeting sent to take place next week, the stage is all but set for another 50-basis point hike in the benchmark rate.
A LOOK FORWARD
- Inflation as measured by the Producer Price Index (PPI) for the month of May will be released on Tuesday; economists expect headline prices to increase by 0.8% on a month-over-month basis and 10.8% on a year- over-year basis.
How does this impact you?
- Impact of the Producer Price Index
- Fresh off a disappointing CPI reading just last week, expectations for May producer prices are equally as dour. Energy prices continue to place immense pressure on inflation indices, and unfortunately there is little the Fed can do to impact supply side issues. As such, those problems will need to be worked out further before we see inflation trend lower.
- While prices have climbed to four-decade highs, markets have seen several months where inflationary measures have cooled – the news has not been all bad for the past 12 months. The major issue is that there has not been a sustained trend in price reduction.
For example, the April reading of both inflation measures was promising, however, barring a major downside surprise, a budding trend now looks doubtful
MARKET UPDATE
| Market Index Returns as of 6/10/221 | WTD | QTD | YTD | 1 YR | 3 YR | 5 YR |
| S&P 500 | -5.04% | -13.62% | -17.60% | -6.65% | 12.41% | 11.91% |
| NASDAQ | -5.59% | -20.12% | -27.26% | -18.56% | 14.10% | 13.85% |
| Dow Jones Industrial Average | -4.56% | -9.05% | -12.78% | -7.15% | 8.68% | 10.50% |
| Russell Mid-Cap | -5.11% | -12.34% | -17.32% | -12.18% | 9.15% | 9.12% |
| Russell 2000 (Small Cap) | -4.37% | -12.83% | -19.39% | -21.22% | 7.04% | 6.19% |
| MSCI EAFE (International) | -4.65% | -10.51% | -15.80% | -16.04% | 3.42% | 3.05% |
| MSCI Emerging Markets | -0.53% | -7.10% | -13.58% | -21.69% | 3.41% | 3.09% |
| Bloomberg Barclays US Agg Bond | -1.52% | -5.02% | -10.65% | -10.56% | -0.68% | 0.78% |
| Bloomberg Barclays High Yield Corp. | -2.33% | -5.96% | -10.50% | -8.50% | 1.98% | 2.97% |
| Bloomberg Barclays Global Agg | -2.26% | -7.95% | -13.62% | -15.93% | -2.68% | -0.48% |
OBSERVATIONS
• U.S. equities retreated for the week S&P down -5.04%
• Small caps also gave up ground but outperformed their larger counterparts with the Russell 2000 shredding
-4.37%
• International stocks outperformed domestic equities, but still in the red down -4.65%.
• Emerging markets were negative returning -0.53%.
• U.S. investment grade bonds were negative with the Bloomberg Barclays U.S. Aggregate Bond index down
-1.52%
BY THE NUMBERS
DOWN A LOT – The S&P 500 is down 17.6% YTD (total return) through the close of trading last Friday 6/10/2022. The last year when the index suffered a “double-digit” loss was 2008, losing 37.0% that year. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. It is a market value weighted index with each stock’s weight in the index proportionate to its market value (source: BTN Research).
FUNDING A RETIREMENT – The S&P 500 has averaged +9.8% per year (total return) over the 25 years ending 12/31/2021. A lump-sum of $865,656 (in a pre-tax account) will sustain a 20-year payout of $100,000 per year (i.e., $2 million of gross distributions before taxes) assuming the funds continue to earn +9.8% annually. This mathematical calculation ignores the ultimate impact of taxes on the account which are due upon withdrawal, is for illustrative purposes only and is not intended to reflect any specific investment or performance. Actual results will fluctuate with market conditions and will vary (source: BTN Research).
SPENDING MORE, SAVING LESS – The nation’s personal savings rate, which soared during the early months of the pandemic, has now fallen back to below its pre-pandemic levels. The savings rate was 7.8% in January 2020, rose to 33.8% in April 2020, and now has dropped back to 4.4% in April 2022. The 4.4% rate is the lowest recorded in the United States since September 2008 (source: Bureau of Economic Analysis).
Reprinted with permission from BTN. Copyright © 2021 Michael A. Higley.