THE WEEK ON WALL STREET In a holiday-shortened week of volatile trading, stocks surrendered some of the previous week’s strong gains. The Dow Jones Industrial Average fell 0.94%, while the Standard & Poor’s 500 declined 1.20%. The Nasdaq Composite index lost 0.98% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, slipped 0.17%. AN UNCERTAIN MARKET Stocks experienced wild swings last week, in part, due to ongoing uncertainty over economic health and the path of inflation. Investors seemed conflicted when interpreting the data, in some instances viewing economic strength as a negative since it may mean more aggressive rate hikes from the Fed. Illustrative of how this uncertainty has played out, stocks surged higher on Thursday despite comments from Fed Vice Chair Lael Brainard indicating it’s unlikely that the Fed will pause on rate hikes. Then on Friday, stocks dropped as a better-than-expected jobs report raised concerns about monetary policy. STRONG JOB GROWTH The U.S economy added 390,000 jobs in May, a slowdown from recent months but higher than consensus estimates. Job gains registered in several categories, led by leisure and hospitality, professional and business services, and warehousing and transportation. The retail sector lost jobs. The unemployment rate remained unchanged at 3.6%. Wage growth cooled off, with a 12-month increase of 5.2%, down from April’s year-over-year jump of 5.5%. Finally, the labor participation rate ticked higher again, reflecting how job availability is helping to pull Americans off the labor-market sidelines. THE WEEK AHEAD: KEY ECONOMIC DATA Thursday: Jobless Claims. Friday: Consumer Price Index (CPI). Consumer Sentiment. THE WEEK AHEAD: NOTABLE COMPANIES REPORTING EARNINGS Monday: Coupa Software, Inc. (COUP). Wednesday: Campbell Soup Company (CPB). Thursday: DocuSign (DOCU). FINAL THOUGHTS “You look at every bear market and they’ve always basically occurred because of an uptick in inflation and an uptick in interest rates.” – Paul Tudor Jones The correction we’ve experienced this year fits Mr. Jones’ sentiment. Still, the enduring questions on the Street remain: What’s the Fed’s next move, and have we bottomed? Most everyone I talk to is somewhat concerned about the markets. They’re just worried because there’s still this issue of, ‘The Fed must crush inflation.’ Whatever the Fed’s done, coupled with the market’s reaction, is already achieving a slowdown. The labor market is a lot softer than it appears. I think inflation is tracking below expectations, and I think the Fed may not have to go as far as people think. Much depends on an investor’s risk profile and time horizon. But sitting on the sidelines could be the costliest mistake. Missing out on a few of the market’s best trading days can have a devasting impact on your returns. Some of the market’s best days happen fast and often come without warning. There’s no telling if we will flush lower later this month, but there’s also a risk in anticipating a recession that will never happen. As the adage goes, economists have predicted nine of the last five recessions. This aligns closely with Peter Lynch’s belief that “far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections.” The Stoics believed a large degree of human events and situations are simply phases that come and go. Our mood swings. Our life aspirations change. Our job or family life changes. And there’s maybe no greater example of this notion than markets. All they do is go through cycles and changes, one after the other. Fear follows euphoria on an almost endless loop. All of it is a phase. It’s a phase in the economy. It’s a phase in monetary policy. It’s a phase in that 2019, 2020 and 2021 were great years for markets, just as bear markets are phases. Now, it’s a phase that we’re amid this correction. Many of the biggest mistakes happen in cycles: People extrapolate uptrends and downtrends into eternity (remember my little lesson on horizon preference a few months ago), but trends usually regress to the mean. The longer an uptrend goes on, the more risk-tolerant and optimistic people become, just when they should be turning more cautious. I still think people bidding up real estate, at least in certain areas, should be careful. I’d posted a very unscientific poll on social media regarding this. I came to the conclusion, “when the price doesn’t matter anymore, it probably matters most.” Yes, price move is related to inflation and demand, but are we extrapolating that into eternity or, like most things in life, is homeostasis a law of the universe? When you’re pleased with your return and markets are surging, you must remind yourself it is a phase. And when you’re stressed, depressed, anxious, angry, losing hope, you must remind yourself of this too. All of it is a phase. No phase lasts forever. No bear or bull market lasts as long as the herd thinks it will. Equities go up most of the time, but sometimes they go down. The top performers come and go. One year a stock or sector is in vogue, the next year it’s sold off 50%. This is why diversification is important. Looking at markets (and life) with this perspective, we can bear them better. Marcus Aurelius, maybe the last of the great Stoics and Roman emperor, never knew when a phase would end – only that it would. Whether we’ve truly bottomed for the year remains to be seen, but I am sure of this: “This too shall pass.” Finally, if you own Amazon stock the bottom didn't fall out this morning. Today is the day their 20 for 1 split goes into effect. So, you have 20 times the shares you had on Friday. Have a great week!
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THIS WEEK'S UPDATE
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June 06, 2022
