Watch the CPK Market Action Report: June 2022
Investors who were looking for a rebound from April’s dismal performance, are still in search of some relief after equity markets finished flat. While inflation, a slowing economy and additional interest rate hikes spike the fears of a looming recession, could a reopening of China be the shining star that breathes some life back into stocks?
Watch the Market Action Report now:
CPK Wealth Market Action Report
June 2022
INTRO TAG
Investors who were looking for a rebound from April’s dismal performance, are still in search of some relief after equity markets finished flat. While inflation, a slowing economy and additional interest rate hikes spike the fears of a looming recession, could a reopening of China be the shining star that breathes some life back into stocks?
That action starts, NOW!
INDEX PERFORMANCE RECAP
Index performance in May was disappointing. The Dow Jones Industrial and the S&P 500 both closed virtually flat, down -.04%. The Nasdaq Composite on the other hand continued its decline closing down -2.03%.
EQUITY UPDATE
The selloff we have been experiencing this year has many of us in search of a bottom. So, I want to share with you three keys to a finding a bottom.
First, Chinese lockdowns need to ease and China’s growth needs to recover. How will we know? China Covid cases will drop, Chinese PMIs will rise back above 50 and the Yuan will move back towards and below 6.50 to the dollar.
There’s been progress over the past two weeks, but the key here is the growth rebound and the removal of the chance for more lockdowns. More progress will be needed before we can say this key to a bottom has been satisfied.
Second, inflation needs to peak and start falling and the Fed needs to ease off their hawkish rhetoric. How will we know? If CPI can get back down near 3%-5% towards the end of the summer in August that will likely make the Fed back off the hawkish rhetoric, confirming “Peak Hawkishness” is upon us and helping to form a sustainable bottom.
Again, there’s been progress over the past two weeks, and it appears we have met peak inflation and peak hawkishness. But the key is the speed of the decline, and right now it’s not fast enough to say this key to the bottom has been satisfied.
Lastly, geopolitical tensions need to decline. How will we know? Oil and other commodities will drop to prewar levels. Unfortunately, there has been no material progress on this front.
BOND UPDATE
We did see the spread between the short- and longer-term yields widen this last month. The 5-year closed out at 2.81% and the 30-year at 3.05%. The 10-year yield settled in at 2.84% ultimately widening the gap with the 2-year yield to its highest level in nearly two weeks to 31 basis points.
With the 10s-2s yield spread in no man’s land, it does signal, at a minimum, slower growth ahead, and we’re seeing that materialize in the data. That’s likely to continue going forward. The key question is, how bad does it get?
COMMODITY UPDATE
Oil blew through the resistance of $111 I mentioned last month to close at $115. 25. The path to least resistance is still higher. For now, supply concerns linked to the Russia/Ukraine war should keep a bid under the market and offset concerns about a significant increase in OPEC+ production until more details are available about the group’s plans.
Copper was able to close out the month at $4.29. Since the early May lows, copper has been showing resilience with a move back towards the mid-$4.00 zone, but some of the momentum was lost at month end. We will want to see copper continue to grind to new highs near term to offer confirmation that risk-on money flows can continue. The end of the two-month lockdowns in Shanghai should result in a resurgence in demand for most commodities but specifically industrial metals as construction and manufacturing restart.
Much like the bounce in copper has lost momentum in recent weeks, the bounce in gold prices also has fizzled. A further rally towards $1,900/oz. is very possible, but in order for that to occur we will need to see the dollar continue to pullback, or at least stay sideways, and real interest rates to remain off the YTD highs. Otherwise, those two headwinds could push gold down to new 2022 lows.
CURRENCY UPDATE
After a quick spike up, the US Dollar dropped to $101.78. Markets have narrowed the perceived policy gap between the Fed and the ECB/BOE with the Dollar Index in the high 101 level, and that’s likely the “fair” price until we learn two things. First, will the Fed “pause” rate hikes after the summer and second, will the ECB or BOE get more hawkish in the face of stubbornly high inflation.
ECONOMIC UPDATE
Recent economic data showed the economy is losing positive momentum and that inflation likely has peaked, although that likely won’t make the Fed materially less hawkish, and the question of whether there’s an economic hard landing remains very much alive and that will keep stock market volatility elevated.
Bottom line, the Fed wants to slow the economy and bring down inflation. Both of those are occurring now, but the key questions remain: 1) How much will the economy slow and 2) How quickly will inflation decline? The answers to those questions will determine whether we see a serious bear market, or a rebound.
THE WRAP
The good news is, many are starting to feel like inflation may have peaked and there is still hope that the Fed can engineer a soft landing avoiding the dreaded recession. There are also expectations that the second half earnings of this year will look a lot better for stocks. Taking all of this into consideration in addition to China reopening their economy and talks that Russia may allow international ships to remove the stockpiled wheat out of Ukraine, there is definitely a glimmer of hope for a better second half of the year.
CPK FOCUS
For the month of June, 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 is on Energy and Agriculture.
As for Domestic Equities, our focus is on Mid Cap Value, Small Cap Value and Mid-Cap Blend with an emphasis on Energy, Basic Materials, Consumer Non-Cyclical, Financials, Utilities, Industrial and Real Estate 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 RISKS, 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 June 2022 Market Action Report. Thanks for joining me. It’s time for me to get back to the markets.
And that action starts, NOW!