Watch the CPK Market Action Report: April 2022
In spite of a 40 year high for inflation, rising interest rates and an inverted 2yr/10yr yield curve, the markets were able to march higher for the month. Will the upward trend continue or will one or more of the headwinds usher in a detour leading the US towards another bear market or something much worse?
Watch the Market Action Report now:
CPK Wealth Market Action Report
April 2022
INTRO TAG
In spite of a 40 year high for inflation, rising interest rates and an inverted 2yr/10yr yield curve, the markets were able to march higher for the month. Will the upward trend continue or will one or more of the headwinds usher in a detour leading the US towards another bear market or something much worse?
That action starts, NOW!
INDEX PERFORMANCE RECAP
Index performance in March provided a much-needed relief to investors. The Dow Jones Industrial was up 2.56% while the S&P 500 picked up 3.83%. The Nasdaq also posted a nice gain of 3.67%.
EQUITY UPDATE
Stocks saw a nice rebound this last month. Although the indexes are still working their way back to even for the year, it is unlikely it will be an easy ride getting them there. As I mentioned last month, we are facing a 40-year high inflation rate in this country that is impacting every segment of the economy and the Federal Reserve is starting to act. This last month they increased their rate .25%. However, the jobs report that was just released showed the need for the next rate to be .50%. By no means will these two hikes alone cure the inflation problem. I expect that we will see a .50% increase in both the May and June FOMC meeting with a return to at .25% hike per meeting for the rest of the year. Generally, an increase in rates has a slowing impact on the economy as the cost for everything will go up. It is unlikely the stock market will be shielded from this. While the recent rebound has been a welcome relief from the declines seen earlier in the year, I am personally in the camp that I expect we will retest the lows from earlier in the year here in the near term.
BOND UPDATE
Bond yields spiked higher for the month with a slight retracement towards the end. The 5yr note ended at 2.42% while the 10yr finished at 2.32%. The 30yr was at 2.44%.
As of March 31st, the 2yr/10yr spread inverted when the shorter-term yield of the 2yr closed at 2.337% and the longer-term yield of the 10yr at 2.331%. If you are asking yourself why this matters, historically it signals trouble is ahead as the markets are expecting the economy to worsen potentially leading to a recession. Just how accurate has this been? Since 1900, this yield curve has inverted 28 times with a recession that followed 78% of the time. However, the lag time between an inversion and a recession is anywhere between 12-24 months with 6 months being the earliest.
Historically, the Fed tries to step in and cuts rates in addition to taking other measures to prevent a recession. Unfortunately, a rate cut is not a viable option this time with rates already at all-time lows and a screaming hot inflation.
Importantly, there is no guarantee there will be a recession this time either. Economists are at odds right now over whether the time-tested predictor is still reliable due to all of the manipulation of rates and quantitative easing from the Fed over the last decade and longer. The key here is that we will need to be watching closely for signs across asset classes in the coming months and quarters that the economic expansion and bull market are coming to an end.
COMMODITY UPDATE
After peaking above $120 early in the month, crude oil dropped sharply to close out at $100.76 a barrel after the Biden administration announced plans to release 1 million barrels a day for the next six months from the strategic petroleum reserve to help lower the country’s gasoline prices. The fact is, right now we are facing a 2 million barrel a day deficit and that is expected to remain the case through the end of the year leaving the fundamental backdrop of the oil market bullish.
After peaking at $5, copper pulled back to close out at $4.72. While the trend in copper is still bullish, if we see a break below $4.50 paired with a flat or inverted yield curve as well as other warning signs about the health of the economy, it could be a new signal that volatility is about to meaningfully rise across asset classes.
Gold had a strong start to the month before retracing all the way back to where it started and closing out at $1936.50/oz. With the outlook for inflation still very high for quarters to come, gold should be able to revisit YTD highs reached in early March.
CURRENCY UPDATE
The dollar was pretty choppy for the month after an initial surge closing out at $98.32. The trend in the dollar will most likely remain higher. Unless the US economy rolls over, it is just a matter of time until we see it hit 100. This will continue to be a headwind on US corporate earnings which will probably be reflected next quarter.
ECONOMIC UPDATE
The most recent inflation reports confirmed what we already knew in that it is still very elevated, it has not peaked and is a growing concern for the Fed. The impact on the economy and consumer is starting to show up in the data. This means the Fed is way behind the curve forcing them to aggressively hike rates which will be a steadily increasing headwind for growth and risk assets. Cracks are already starting to emerge with the drop off in consumer spending and savings rate. As we move forward, we will want to see some clear signs that the economy can weather such an aggressive shift in policy. Otherwise, the threat of stagflation will become significant.
THE WRAP
Inflation, concerns of a slowing economy, rising wage costs and a potential indication of a looming recession. These are not the ideal ingredients of a delicious treat for investors. While I am sure some of you would enjoy hearing a lengthy speech from me about all of this, I am going to keep my thoughts pretty short here and just tell you that our approach is going to remain the same as always. We are not going to overreact to any of this. During times such as these, it is extremely important that we watch the data closely and continue to take an active approach to managing assets.
Nobody has a crystal ball to tell you exactly what it going to happen and ultimately somebody is always going to be wrong in the end. Our approach has treated us and our clients very well including during the 2008 real estate crash and even more recently during the Covid crisis.
We will remain diligent in our efforts to stay focused on the facts by following the charts and research. As always, we will do our best to keep you informed with this monthly video as well as our quarterly contacts with each of you.
CPK FOCUS
For the month of April, the cash allocation in our equity models remains between 30% and 40% due to the model’s more aggressive nature. However, this could be increasing if we see signs of further deterioration. Again, I am proud to say that this approach has kept our performance ahead of all the major index’s year to date. Our broad focus remains on Commodities and Domestic Equities.
For Commodities, our focus remains on Energy and Industrial Metals.
As for Domestic Equities, our focus is on Mid Cap Value, Small Cap Value and Mid-Cap Blend with an emphasis in the Energy, Basic Materials, Financials and Industrial sectors.
CPK DISCLAIMER
As a reminder, my current allocation is not a recommendation. Regardless of what happens next, investors like you need to have a simple and yet solid financial plan that reduces RISK, COSTS and TAXES while securing the necessary income you need to maintain your lifestyle throughout retirement.
If you don’t have a plan OR you’re not comfortable with the plan you have, call me today to get pointed in the right direction.
I’m Chad Kunc and that puts a wrap on the April 2022 Market Action Report. Thanks for joining me. It’s time for me to get back to the markets.
And that action starts, NOW!