Market Perspective for May 1, 2022

The stock market had another negative week to finish the month. Markets are facing concerns from inflation, a tightening Federal Reserve, rising interest rates, the continuing war in Ukraine and increasing Covid cases in China. Corporate earnings also weighed on stocks.

The Nasdaq had the worst of it, falling 13.3 percent for April, making it the worst month since 2008. The Nasdaq fell almost 4.2 percent on Friday, mainly because of Amazon and other large tech companies.

On Friday, the S&P 500 dropped 3.6 percent, and the Dow Jones Industrial Average dropped 939 points, or 2.8 percent. The Nasdaq and S&P 500 finished the day at new lows for 2022, taking out the previous low set in March.

For the month, the S&P 500 lost 8.8 percent, and the DJIA lost 4.9 percent. That was the worst month for the S&P 500 since March 2020 at the start of the pandemic.

The Nasdaq is now in a bear market, 23.9 percent lower than its intraday high. For the year, the S&P 500 is off its record high by 14.3 percent, and the DJIA is 10.8 percent lower.

On Thursday, the major market indexes rallied, mainly because of a good earnings report from Meta Platforms. The Nasdaq jumped 3.1 percent, the DJIA gained 1.9 percent, and the S&P 500 added 2.5 percent. Unfortunately, it wasn’t enough to keep the markets from tanking on Friday or saving the month.

Amazon fell 14 percent on Friday after it reported a loss of $7.6 billion on its investment in Rivian, the electric vehicle maker, and issued weak revenues for the second quarter. They are now projecting earnings of between $116 billion to $121, less than the expected $125.5 billion. The 14 percent loss on Friday was the largest drop for Amazon since July 2006.

Amazon wasn’t the only tech stock to drop because of negative news on Friday. Intel lost 6.9 percent when they reported weak guidance for the fiscal quarter, and Apple fell 3.7 percent when the company stated that supply chain problems could hinder revenue for the fiscal third quarter.

Even with the backdrop of inflation worries and the tightening Fed, about 80 percent of the S&P 500 companies reporting to date have beat quarterly earnings expectations, with 50 percent of the companies reporting so far.

The gross domestic product came in with a surprising decline of 1.4 percent for the first quarter. It was surprising because this reversal is quite abrupt, considering the last GDP report was the best number since 1984.

The estimate had the GDP coming in with a 1 percent gain for the quarter. The market basically shrugged off this number since the decline is attributed to factors that should reverse later this year. It is still believed that the U.S. will avoid a recession and the next GDP report should give us better guidance.

One reason that the report did not garner much concern was that consumer spending remains strong. Consumer spending accounts for almost 70 percent of the U.S. economy and is still growing at a solid pace.

Personal consumer spending sped up slightly from 2.5 percent previously to 2.7 percent. For comparison, consumer spending grew at an average of 2.3 percent during the past decade. As we move further away from the pandemic, consumer spending has shifted from the purchase of goods and moved more towards services like travel, dining out and concerts.

There are signs that inflation is beginning to flatten, or at least not continue to rise at the record pace that it has been. Consumer spending rose faster than inflation for the third month in a row. This can also slow inflation since services rise slower in price than they do for goods.

Another sign inflation is starting to flatten is that core prices, excluding food and energy, rose 5.2 percent in March from the previous year. That was below the year-over-year increase of 5.3 percent in February, the first decline since February 2021.

Housing prices continued their upward pace, increasing 19.8 percent in February year-over-year. Sun Belt cities like Miami, Tampa, and Phoenix saw home price increases ranging from 29.7 percent in Miami to 32.9 percent in Phoenix.

According to Zillow, the average 30-year fixed mortgage is at 4.89 percent, down 10 basis points for the week. But other places are showing the average rate for a 30-year fixed mortgage as high as 5.12 percent.

Adjustable-rate mortgages (ARMs) have recently become more popular as interest rates rise. The rate for a 5/1 adjustable-rate mortgage is 4.38 percent. A 5/1 ARM means that the rate is fixed for five years, and the 1 means that it will readjust once every year for the remaining life of the loan. The risk with an ARM is if interest rates are considerably higher when the loan adjusts after five years and the interest on the loan jumps higher.

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