Bob’s Journal for 5/26/22

The Stocks that Led the Market Indexes Higher are Leading Them Down in 2022

It always is interesting to look into the details of the stock market indexes to identify the stocks and sectors steering the indexes. 

It is especially interesting to do so after big market moves. You’re probably aware that after the pandemic bottom in 2020, the surge in the stock indexes was led by large growth company stocks, mostly technology companies. The FAANGs (Facebook, Amazon, Apple, Netflix, and Google/Alphabet) accounted for a large portion of changes in the S&P 500.

That continues to be the case, because it’s not unusual for five to 10 of the largest stocks to be responsible for much of the change in the capitalization-weighted indexes. But in 2022, those few large company stocks are dragging the S&P 500 down.

As of last Friday’s close, the S&P 500 had seven consecutive weeks in which it ended lower than the previous week’s close. That marks the most consecutive weeks of losses since March 2001 and only the fourth time the index has been down seven or more consecutive weeks since World War II, according to Bespoke Investment Group.

Only two sectors of the S&P 500 had positive returns for the year to date, as of last Friday.

The energy sector is way ahead of all the others, with a return exceeding 48% so far in 2022. The only other sector with a positive return was conservative utilities, with a slight 0.89% gain.

The worst-performing sector in 2022 is one that was among the two leaders during the pandemic recovery, consumer discretionary. It is down more than 31% so far this year. This sector includes Amazon, plus a number of retailers of luxury and non-essential goods.

The performance gap between the energy and consumer discretionary sectors now is 80 percentage points. Two sectors of the S&P 500 haven’t previously had such a large performance difference in a short period, according to Bespoke.

Turning to individual stocks, eight account for about half of the decline in the S&P 500 in 2022, according to an analysis by The Wall Street Journal. Those stocks generally are the ones that pushed prices higher before 2022: Microsoft, Apple, Amazon, Alphabet, Meta Platforms (formerly Facebook), Tesla, Nvidia and Netflix. 

At the start of the year, these stocks accounted for 25% of the index because of its capitalization weighting. 

At the close of 2021, the S&P 500 had a 90% return for the previous three years.

This is a normal turn of events. The capitalization-weighted indexes are momentum investments. The largest companies account for a high percentage of the indexes, so the stocks of those companies move the indexes. Most other companies account for small percentages of the indexes. Their stock performance has little effect on an index overall.

Consumer staples stocks usually hold up well in market downturns, and they were doing that until last week.

The consumer staples sector was down 6.94% last week and now is down 8.09% for 2022.

Retail sales data and reports from the largest retailers spurred this change. Inflation, higher interest rates and the potential for a recession are reducing consumption. The result is that Target lost 25% in one day and Walmart lost 11% the day before.

Some analysts say this looks like a buying opportunity. That would be the case if the Federal Reserve still were supporting stock prices with loose monetary policy.

But this time, the Fed has to deal with high inflation. It is likely to keep tightening monetary policy until it is clear that inflation is heading lower.

How the Crash in Digital Currencies Was Triggered

Digital currencies and related assets have declined even more than the stock market indexes in 2022.

One reason for the decline was tighter monetary policy. Investors re-value risky assets when interest rates rise. They re-evaluate again when the risk of a recession increases. Once inflation rose and it was clear the Fed had to raise interest rates, digital currencies were going to decline.

The short experience we’ve had with digital assets indicates their high prices are highly correlated with growth stock prices, not with inflation. When the stock market weakened, digital currencies were bound to weaken as well.

But that doesn’t account for the spectacular decline of most digital assets. Questionable activities are a major reason digital assets have declined so much.

For example, a sector of the market called stablecoins crashed. These assets were supposed to be, as the name says, stable. They are said to be backed by and tied to other assets, such as the U.S. dollar.

It turns out that some of the stablecoins weren’t backed by real assets. Instead, computer algorithms linked their values to other digital assets. Those stablecoins, such as Luna and Tether, appreciated before 2022 because large investors backed them and made big profits very quickly during the digital currency boom.

They took their profits long before the currencies crashed, according to a report in The New York Times. It is the retail investors who bought the hype who are suffering huge losses now.

Retirement Medical Costs Are a Mystery to Many Americans

Many retirees and pre-retirees fear they’ll run out of money because of unexpected, out-of-pocket medical expenses. They have this fear largely because they misunderstand key facts about retirement medical insurance.

The latest annual estimate from Fidelity estimates that a couple, in which each spouse is 65 years old in 2022, can expect to spend on average $315,000 on medical care and related expenses over the next 30 years. That’s 5% higher than last year’s estimate.

Other research by Fidelity that accompanied the report found that most Americans don’t understand retirement medical expenses.

For example, Fidelity found that most Americans estimated the couple would spend $41,000 on medical care. About 68% of survey respondents thought the total medical expenses would be less than $25,000.

The Data

Existing home sales declined by 2.4% in April from March’s level. Sales were 5.9% lower than 12 months earlier. For each of the last eight months, sales have been lower than they were 12 months earlier. 

One possible reason for lower sales is that the median price of an existing home increased to a record $391,200 in April. Higher mortgage rates also might be a factor.

But the inventory of homes for sale continues to exceed the demand, according to the National Association of Realtors (NAR). Demand that exceeds supply is what is pushing prices higher but keeping the number of sales low.

New home sales in April were 16.6% lower than in March and 26.9% lower than one year earlier. Also, sales numbers for each of the three previous months declined substantially. 

New home sales in 2022 have been lower than before the pandemic. One reason for the decline in new home sales is that the inventory of new homes completed and ready for sale is lower than normal. Also, because of supply chain problems, the number of homes under construction but not completed has increased to well above average.

New unemployment claims increased by 21,000 to 218,000 for the latest week. This is the third consecutive week the number of new claims rose.

But continuing claims for unemployment declined to a 50-year low of 1.3 million, the lowest level since December 1969. The data for continuing claims are one week behind the new claims data.

The Philadelphia Fed Manufacturing Index tumbled in May to 2.6 from 17.6 in April. The May number indicates the sector still is growing.

The Richmond Fed Manufacturing Index also declined, sliding to 14 in April from negative 9 in May. The May number indicates a contraction in the sector. 

Durable goods orders increased 0.4% in April, which is down from the 0.6% jump in March. Core capital goods orders, considered a good measure of business investment, gained 0.3% in April. That’s much lower than the 1.1% increase in March.

Economic growth declined in the first half of May, according to the PMI Composite Flash index. 

The manufacturing index declined to 57.5 in the first half of May from 58.9 at the end of April. The services index fell to 53.5 in May’s first half, compared to 55.3 at the end of April. The composite index was 53.8 at mid-May, down from 55.5 at the end of April.

All those levels indicate the economy still is growing, because they are above 50, but they indicate growth rates were lower than in April.

The Leading Economic Indicators index for April was a negative 0.3%. That compares to a positive 0.3% in March.

The index is up 0.6% over six months, according to The Conference Board. Weak consumer expectations and a decline in residential building permits were the main reasons for the decline in April.

The Conference Board forecast growth should be moderate the rest of the year, based on the index. The organization is projecting a 2.3% growth rate for all of 2022.

The Markets

The S&P 500 lost 3.53% for the week ended with Tuesday’s close. The Dow Jones Industrial Average fell 2.12%. The Russell 2000 decreased 3.87%. The All-Country World Index (excluding U.S. stocks) rose 0.14%. Emerging market equities declined 1.43%.

Long-term treasuries rose 3.84% for the week. Investment-grade bonds increased 2.10%. Treasury Inflation-Protected Securities (TIPS) added 0.57%. High-yield bonds gained 0.77%.

On the currency front, the U.S dollar declined 1.52%.

Energy-based commodities increased 0.12%. Broader-based commodities rose 0.59%. Gold gained 2.81%.

Bob’s News & Updates

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