Puzzle Pieces

Stocks recorded another week of losses, as investors appeared to grow increasingly skeptical that the Federal Reserve will be able to achieve a “soft landing” for the economy by raising rates enough to tame inflation without causing a recession. The Cboe Volatility Index (VIX) remained elevated, but slightly below its recent intraday high on May 2. Many cryptocurrencies plunged in value, further suggesting a strong “risk-off” environment.

Last week marked the sixth consecutive weekly decline for both the S&P 500 Index and the Nasdaq Composite, as well as the seventh for the Dow Jones Industrial Average—the longest stretch for the latter since 2001. At its low point on Thursday, the S&P 500 was down nearly 18% from its peak, well into correction territory, but just above the -20% performance threshold that typically defines a bear market. The benchmarks pared some of their losses on Friday, helped by a rally in Tesla shares after CEO Elon Musk tweeted that his deal to buy Twitter—partly funded by sales of a portion of his considerable stake in the electric car maker—was “on hold.”

Five themes seem to be behind the market’s continued declines: the Fed’s accelerated pace of monetary tightening, persistently high inflation data, worries about slowing growth, disruptions caused by China’s strict COVID-19 lockdowns, and Russia’s invasion of Ukraine.

Negative signals on each theme arguably emerged during the week, but it may have been Wednesday’s inflation data that weighed the most on sentiment. Headline consumer inflation fell back a bit from March’s pace but not as much as expected, rising 8.3% year over year versus consensus estimates of around 8.1%; likewise, core consumer inflation (excluding food and energy) pulled back less than expected to 6.2% versus 6.0%. Core producer prices rose a bit less than expected in April, but March’s monthly gain was revised higher to a record 1.2%.

Particularly worrying to investors may have been the 0.7% monthly surge in consumer prices for services (less energy services), indicating that inflationary pressures were moving beyond manufacturing and energy supply chains and becoming more broadly embedded in the economy. Airline fares jumped 18.6% over the month, for example, the largest increase on record.

There were some glimmers of optimism, however, which contributed to the Friday rally. Despite inflation gauges not moderating the amount hoped, they may show inflation reached a peak in March. Lower COVID infection rates in China show encouraging signs of easing lockdown restrictions, and members of the Federal Reserve continue to indicate that more aggressive 0.75% rate hikes are not currently anticipated.

Through the weeks ahead, these main themes will continue to develop. While news stories and analysts give input that all points in different directions, (usually) the stories contain a piece of the overall picture. Like a puzzle, more pieces are necessary to catch a glimpse of the full picture. As Proverbs 1:5 states “Let the wise hear and increase in learning, and the one who understands obtain guidance.” Our team continues listening for all relevant information to learn and exercise understanding, as emerging narratives create opportunity.

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