Weather the Storm

1. Investor Sentiment: We have learned from historic bear markets that the best strategy has usually been to weather the storm. We caught a glimpse of this last week, as the S&P 500 closed up 6.46%, giving the market and investors some relief. The impressive week ended on the same day that we received the University of Michigan Consumer Sentiment report that came in at 50.0, down from 58.4 in May. This reading marks the lowest point for consumer sentiment since 1978. With sentiment at all time lows, we find it interesting that the market had a solid week of returns. Markets like these are challenging and call for investors to remain disciplined and remove emotion from decision making. That said, they offer the opportunity to upgrade portfolios and invest in quality companies when they are on sale.   

Chart 1: University of Michigan Consumer Sentiment Survey¹

• Commodities Pricing in a Slowdown?: Investors also saw commodity prices rolling over this month with Copper (-11.67%), Steel (-7.01%), Iron Ore (-10.38%). Commodity metals showing softening can be supportive of lower prices in general. Chart 2 below displays the difference between the S&P 500 index and the S&P Goldman Sachsommodity index year to date. In addition, Crude Oil (-1.77%) and Natural Gas (-10.43%) have also pulled back over the last week. Based on structural changes in the global energy market, we believe that energy will stay elevated despite the slowing we saw this past week. This slight change will further challenge the Fed, which has to decide how aggressive they will be to contain inflation while they try to avoid a recession. Even if commodities fall, we continue to watch other parts of sticker inflation like wages, rents, healthcare and education.

Chart 2: S&P 500 vs S&P GSCI²

3. Continuing the Hawkish Outlook; Bonds Rally: This week, we heard Federal Reserve Chair Powell reiterate hawkish remarks during his testimony in front of the Senate Banking Committee. He restated that the Fed would hike another 75 bps in July and September, after just completing a 75 bps hike in June. He also said that “a recession is certainly a possibility.” There will be a great deal of data coming out between now and then. Next week all eyes will be on the Core PCE deflator as that comes out on Thursday, followed by CPI and PPI during the midpart of July.  
    
   In response, both Treasuries and municipal bonds rallied, as the entire curve shifted 8-11 bp lower with moderate flattening. Corporate spreads tightened slightly in the latter half of last week, but finished wider overall (IG +4, HY +12).  

4. S&P Multiples Close to Historical Average: We have seen the S&P 500 earnings multiple contract to 16.46x in June, while in January we were still above 21x …  

Chart 3: S&P 500 P/E NTM with Historical Average³ 

5. Earnings Season Sneak Peek?: With earnings season coming up in a few weeks, we will be watching to see the progress of companies on a micro scale while keeping the important macro topics in mind. We got a taste of earnings this past week as Accenture (ACN)⁴ and FedEx (FDX)⁵ both reported. Accenture posted 30% growth in consulting, with 19% growth in outsourcing and their second highest booking on record. They are still expecting 24-26% total revenue growth, highlighting that global companies are still strong. FedEx also came out with strong earnings as they raised guidance for 2022, noting the strength of their pricing power. Neither company discussed the possibility of a 2023 recession in their remarks …  

6. The Week Ahead.  

Econ – Wednesday: Final GDP revision, Fed Chair Powell speaks. Thursday: Core PCE. Friday: ISM Manufacturing PMI. 

Earnings – Monday: NKE. Wednesday: MU.  

Stephanie Link: CNBC TV Schedule 

Return for Selected Indices⁶ 

Sources

1. Factset
2. Factset
3. Factset
4. Barron’s
5. Bloomberg
6. Bloomberg

Disclosures

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