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Watch the CPK Market Action Report: May 2022

April was a brutal month for stocks with the Nasdaq Composite posting its worst monthly performance in 14 years. Is the recalibration of the markets a mere functionality of the Fed’s move to raise interest rates higher or is there much more to the story that investors should be worried about?

Watch the Market Action Report now:

CPK Wealth Market Action Report

May 2022


INTRO TAG

April was a brutal month for stocks with the Nasdaq Composite posting its worst monthly performance in 14 years. Is the recalibration of the markets a mere functionality of the Fed’s move to raise interest rates higher or is there much more to the story that investors should be worried about?

That action starts, NOW!   

INDEX PERFORMANCE RECAP

Index performance in April was painful. The Dow Jones Industrial lost -5.08% while the S&P 500 closed down -8.99% posting its worst month since October 2008 during the financial crisis. The tech wreck in the Nasdaq Composite was the most painful of the major indices dropping -13.56%. 

EQUITY UPDATE

Stocks were all over the map throughout the month. However, the intensified selling pressure came in the last week of the month after Deutsch Bank called for a 5-6% Fed Funds Rate (Currently .50%) and a “deep recession” in addition to somewhat anticipated soft earnings and forecasts out of tech giants Apple and Amazon which ultimately led to a 14% decline on Friday alone for the online distributor.

While the most recent action in equities has been beyond ugly, I would not be surprised if we see some bear market rallies in the coming sessions. While sentiment is really negative right now, the reality is, the market selloff over the last two weeks is not due to a lot of incrementally bad news, rather a total lack of any “good news.” Now, that does not mean the selloff is over. My personal belief is that we should all be prepared to see more selling pressure until the Fed becomes less hawkish, we see some resolve between Russia and Ukraine and China changes its stance on lockdowns effectively shutting down its economy every time Covid cases reappear. 

BOND UPDATE

Interest rates are being forced higher by the new the policy of the Fed. The 5yr note ended the month at 2.91% while the 10yr finished at 2.88%. The 30yr was at 2.94%. However, as I write this, the 10yr Treasury has just topped 3%.

I stated last month that the 2yr/10yr spread inverted. While that reversed itself during the month, the two seem to be inching back towards their inverted status. At this point, I do not see any further material impact from another inversion other than to confirm the elevated risk of a recession here in the U.S. I want to remind you, there is no guarantee there will be a recession. Additionally, economists, portfolio managers, CEOs and market analyst alike are all at odds right now over whether or not a recession is even plausible. Regardless, the narrow spread of the 10/2 yield curve does clearly signal that slower growth lies ahead.  


COMMODITY UPDATE

Once again, oil peaked mid-month before settling back down at $104.52 a barrel on news of the China lockdowns from new Covid cases. On the charts, WTI futures remain range bound between support at $99/barrel and resistance at $111/barrel. 

Copper was fairly steady during the first half of the month before falling sharply to close out at $4.36. This negative price action makes me concerned about the macro-outlook and will have me on the lookout for signs of further deterioration. 

Staying with the commodity theme for the month, Gold too had a nice run through mid-month before it reversed course as well falling over 5% peak to trough and closing out at $1906/oz. This drop through its near-term support level has changed the short-term outlook from bullish to neutral.

CURRENCY UPDATE

The dollar had a meteoric surge to a 20yr high this month before retracing slightly and closing out at $103.21. All major economic regions of the world are facing major growth headwinds making it very difficult for them to raise rates. As such, the US Dollar will most likely remain buoyant and inevitably become an increasing strong headwind on our corporate earnings and U.S. growth as we move into the second quarter.  

ECONOMIC UPDATE

A deeper review of month end data showed things weren’t as bad as they appeared on the surface and were more status quo. Moreover, first quarter GDP revealed a surprise decline of 1.4% versus the expected 1.1% prompting a lot of recession conversations in the financial and mainstream media. However, that drop was driven by a decline in government spending and a high level of imports. The actual core measures were solid indicating the economy was still in “reflation” mode (solid growth/high inflation), not “stagflation” mode (slow/no growth and high inflation).  

THE WRAP

In case you have been living in a bubble and not listening to the news or my videos, let me provide you with a few bullet points as to why the market has been struggling as of late. 

  • Inflation is at a 40 year high here in the U.S.
  • Federal Reserve has stopped their quantitative easing and is now raising interest rates to try and mitigate the inflation problem
  • Economic reports indicate a slowing domestic and global economy
  • U.S. has a shrinking labor force
  • U.S. is experiencing rising labor costs
  • U.S. National debt has expanded well beyond our GDP and keeps growing daily
  • Yield curve of the 2yr/10yr Treasury has recently inverted and remains narrow
  • U.S. is expecting substantially further increases on food costs
  • U.S. real estate market is inflated 
  • Russia/Ukraine war is causing global systemic issues with commodities
  • China continues Covid lockdowns

Now, I am not going to go into great detail as to what each of these mean other than to say they each represent some very big hurdles to overcome to avoid further slowing of the economy and potential financial hardship for some. Additionally, during my 20+ year career, I have found that it is easy for us as humans to overlook the obvious until it is too late, and it is in our rear-view mirror. So, these issues are present and real and could easily flip this economy on its tail in very short order.

While nobody knows exactly how all of this will work out over the next 6-12 months, I am very confident in our investment process to navigate us through whatever path the market and economy takes. Very few managers have a process to raise cash up to 100% in an effort to protect your principal like we do. If you have family members or friends who are searching for a better investment process, please contact our office so we can discuss how to get them pointed in the right direction. 

CPK FOCUS

For the month of May, 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 solely on Energy.

As for Domestic Equities, our focus is on Mid Cap Value, Small Cap Value and Mid-Cap Blend with an emphasis on Basic Materials, Energy, Financials Real Estate, Consumer Non-Cyclical 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 May 2022 Market Action Report. Thanks for joining me. It’s time for me to get back to the markets.

And that action starts, NOW!