Weekly Market Insights 05.16.22

Chaotic Markets Reflect a Chaotic World

Financial Markets

Clearly, the markets have been trading in a chaotic fashion.  For the past two weeks, significant moves have been made early only to reverse trend by week’s end.  It is well-known that markets abhor uncertainty, which, of course, is true.  At the risk of being redundant, a better way of expressing it is that financial markets reflect fears and hopes of every kind, not just those that are financially-related.  They, the markets, blend all of these emotions, and, in some manner, cast a vote reflected in market movements.  More about this in the economics portion of this paper.

The Dow closed the week down 2.14%, the S&P closed down 2.41%, and NASDAQ closed down 2.80%.  Those numbers don’t nearly reflect the volatile trading that went on during the week.  In the first four days, markets behaved as if they would continue on the path of the past Friday’s decline, and many investors felt we were headed for a bear market.  Along comes Friday, and a stunning reversal occurs. Although the equity markets closed the week down, Friday’s powerful reversal was substantial.

Does this signal a change for the market?  Perhaps, but rallies in poor markets are not uncommon, and only time will tell.

Economics

Earlier, we wrote how financial markets reflect not just uncertainty over financial matters, and, instead, they homogenize the wide variety of hopes and fears of the population.  Here are a number of issues we believe investors are most concerned about.  Of course, the biggest factors remain unchanged—the Fed’s monetary policy decisions, inflation, and the pandemic.  Polls tell us that people are concerned about the combat in the Ukraine, how long will it continue, and the possibility of violence spreading to other regions.  The political situation in the United States is not reassuring.  Regardless of which side of the aisle people are on, they don’t appear to be comfortable with what is going on in Washington.  Peggy Noonan has an excellent article in this past weekend’s Wall Street Journal about these concerns.  Every week, people read about violence in the streets.  To add to it all, we are entering the mid-term election period, which can be disconcerting to investors in itself.  Last but far from least is China.  We don’t want to read as a tabloid, but we want readers to be aware that all of these things work their way into financial markets.

Inflation was reported this past week at 8.3%.  Although lower than the last report, it was higher than expected.  In other words, the rate of inflation moved in the right direction but with the wrong magnitude.  We expect inflation numbers to continue to fall, but it seems unlikely to fall as rapidly as investors hope.  Strains on supply chains appear to be easing, and the economic growth may be softening, both of which take pressure off pricing.  Also, if the labor participation rate¹ resumes its rise, it should result in an easing of wage growth.

We have written a lot about China.  Our view has been that China’s economy was not nearly as strong as one might think.  We continue to feel that way.  More about China next week.

Conclusion

Although the path of the economy remains confusing, we do not feel a recession is in the near future.  Certainly, as the Federal Reserve continues to tighten, the economy will slow, which in a seemingly paradoxical way will be a good thing.

Read PDF here.