Weekly Market Update

After registering back-to-back 5%+ weeks of declines, a feat that has only occurred eight times since WWII, the S&P 500 posted its largest gain to kick off a week (+2.45% on Tuesday) since “Pfizer Monday” in November 2020 (per FactSet) and never looked back, closing over 6% higher on the week. The S&P 500 was likely due for an oversold rally, but this week’s strength coincided with some notable reversals in trends that had been spooking investors. Firstly, interest rates which exploded last week and saw the yield on the 10-year US Treasury briefly eclipse 3.48%, its highest levels since April 2011, reversed significantly and finished this week around 3.13%. Secondly, energy and commodities have continued to come under pressure with US natural gas prices falling over 20% in June, copper down 20% in just the last 10 trading days, and energy stocks as measured by XLE falling over 20% since June 8th and trading back around levels not seen since Russia invaded Ukraine at the end of February.

As a result, the peak inflation and peak Fed tightening narratives that helped the S&P 500 bounce over 6.5% in the final week of May, have come roaring back and stocks ended the week with notable strength, rising over 3% on the last Friday of the first half of 2022. Beyond the respite in the rise of energy prices, commodities prices, and interest rates, there were also encouraging indications from Thursday’s manufacturing and service reports that showed the slowest input price growth (for manufacturing) since April 2021 and the softest price inflation in five months (for services). Lastly, Friday’s University of Michigan Consumer Sentiment survey, while coming in at a record low, also showed inflation expectations, a metric Fed Chair Jerome Powell explicitly cited during his June 15th press conference as a reason for hiking 75 basis points instead of 50, have materially cooled. Therefore, with markets deeply oversold, fears around runaway inflation potentially moderating, and a strong likelihood for robust equity rebalancing inflows after the worst first half for the S&P 500 since 1970, stocks enter the last week of June with momentum. Next week features the release of the Fed’s preferred gauge for inflation, Personal Consumption Expenditures, or PCE, but barring a red-hot number, it will be very interesting to see if the second quarter can continue to rally similar to the end of the first quarter (see chart below from Bespoke).

Ian G. Browning, CFA
Managing Director, Investment Strategies | Shareholder