Keeping and Eye on Inflation

Weekly Market Update | May 9, 2022

Home › Market Commentary › Weekly Market Update

Highlights

The global equity market remained volatile last week with the MSCI AC World Index falling for a fifth consecutive week (down 1.5% on the week). In the United States, equity markets were whipsawed on Wednesday and Thursday, but the Dow Jones and the S&P 500 both closed the week just 0.2% lower. The NASDAQ continued to correct – slipping 1.5%. Markets overseas were not spared with European and Japanese stocks each down 4.1%. The nominal 10-year U.S. Treasury yield continued to climb higher – rising 19-basis- points – as the Federal Reserve moved forward with tightening monetary policy.

The April consumer price index (or CPI) is expected to show U.S. inflation trending lower. This could be welcomed news, but the details of the report will be key as investors digest whether it is largely a machinal move lower or part of a more substantial trend. President Biden has already announced that he will address the nation following the release of the report. We do not envision the report deterring the Federal Reserve from hiking rates at their next couple of meetings.

We would remind investors that bear markets are often followed by substantial and lengthy stock market recoveries.

Shawn Snyder Head of Investment Strategy,
Citi Personal Wealth Management

Last Week's Close

S&P 500 4,123 ()

dow jones industrial average 32,899 ()

NASDAQ 12,145 ()

Keeping an Eye on Inflation

The key event this week will be on Wednesday when the April consumer price index (or CPI) will be released. Consensus expectations are calling for U.S. inflation to fall from 8.5% in March to 8.1% in April. Core inflation, which excludes the volatile categories of food and energy and is often thought to more accurately reflect the true pace of inflation in the underlying economy, is expected to retreat from 6.5% to 6.0%. If accurate, this downtrend may be welcomed by both financial markets and policymakers.

However, the Federal Reserve will probably see this level of inflation as still too high and remain on a path to hike interest rates by 50-basis-points at least two or three more times. This is in line with what Atlanta Fed president Raphael Bostic told Bloomberg news recently when he stated that, “I think we can stay at this pace and this cadence and really see how the markets evolve…We are going to move a couple times, maybe two, maybe three times, see how the economy responds, see if inflation continues to move closer to our 2 percent target, then we can take a pause and see how things are going.”¹ We find it interesting that financial markets have largely ignored the dialing back of Fed rate hike expectations (see figure 1) and that financial conditions are already approaching something closer to neutral (see figure 2). This may take some pressure off the Federal Reserve later in the year should inflation ease some. It is very early days, but these trends could be tentative signs that the odds of a “softish” landing may be rising very slightly.

Figure 1. Number of Fed Rate Hikes Expected by December 2022

Figure 2. Chicago Fed National Adjusted Financial Conditions Index

A Stabilization in Bond Yields is Critical

The recent market sell-off has been felt most acutely in the technology sector with the NASDAQ officially in bear market territory and off 27.6% from its all-time high (though we would remind investors to keep the recent sell-off in perspective with the NASDAQ still 69.4% above its March 23, 2020 low). Some of this is due to a normalization in behavioral patterns with individuals less tied to their homes as life returns to something more akin to normal (see figures 3-4), while the rest may be bound to the sharp rise in bonds yields with technology stocks particularly sensitive to bond yields as investors discount future earnings (see figure 5). It is hard to know exactly when bond yields will stabilize, but less Fed surprises moving forward should be helpful and trendlines suggest we may be nearing a peak (see figure 6).

Figure 3. Retail E-Commerce Sales (YoY%)

Figure 4. Household Spending on Transportation Services (YoY%)

Figure 5. NASDAQ Relative to the S&P 500 vs. the Real 10-Year Treasury Yield

Figure 6. 10-Year U.S. Treasury Yield (%)

The Case For Staying Invested

Market volatility is likely to stay elevated during this period of economic transition. However, history suggests that these types of events can change quickly and that trying to time the market is nearly impossible. History also indicates that there is little reason to try. Since 1990, simply staying invested would have netted an investor an average annual return of 10.8%. However, if an investor tried to time the market and missed the 20 best days, the average annual return drops to just 6.3% (see figure 7). We would also point out that 8 of the top 10 best days have occurred within just two weeks of the 10 worst days. This past week was a perfect example with the Dow Jones Industrial Average up 932.3 points on May 4th and down 1,063.1 points of May 5th. Unfortunately, exiting positions as a result of volatility is usually a losing endeavor and typically weakens returns. We would also remind investors that bear markets (defined as a sell-off that is 20% or more), are typically followed by periods of substantial and lengthy recoveries (see figure 8).

Figure 7. Hypothetical Performance of a $10,000 Investment in the S&P 500 from 1990 to 2021

Figure 8. S&P 500 Bear Market Recoveries Since 1932

S&P 500 Bear Market Recoveries
Trough		Peak		Trough to Peak %	Number of Days
Date	Level	Date	Level	Trough to Peak %	Number of Days
06/01/1932	4.41	09/07/1932	9.31	111.14%	82
02/27/1933	5.53	07/18/1933	12.20	120.73%	110
10/21/1933	8.56	02/05/1934	11.81	37.94%	88
03/14/1935	8.06	03/06/1937	18.68	131.72%	596
03/31/1938	8.50	11/09/1938	13.79	62.22%	186
04/08/1939	10.19	10/25/1939	13.21	29.67%	168
06/10/1940	8.99	11/09/1940	11.40	26.75%	128
04/28/1942	7.47	05/29/1946	19.25	157.70%	1212
05/17/1947	13.72	06/15/1948	17.07	24.43%	304
06/13/1949	13.55	08/02/1956	49.75	267.10%	1890
10/22/1957	38.98	12/12/1961	72.64	86.35%	1043
06/26/1962	52.32	02/09/1966	94.06	79.78%	914
10/07/1966	73.20	11/29/1968	108.37	48.05%	517
05/26/1970	69.29	01/11/1973	120.24	73.53%	666
10/03/1974	62.28	07/15/1975	95.61	53.52%	197
09/16/1975	82.09	09/21/1976	107.83	31.36%	258
03/16/1978	89.51	10/05/1979	111.27	24.31%	395
11/07/1979	99.87	11/28/1980	140.52	40.70%	268
08/12/1982	102.42	08/25/1987	336.77	228.81%	1274
12/04/1987	223.92	07/16/1990	368.95	64.77%	660
10/11/1990	295.46	07/17/1998	1186.75	301.66%	1963
08/31/1998	957.28	03/24/2000	1527.46	59.56%	396
10/09/2002	776.76	10/09/2007	1565.15	101.50%	1257
03/09/2009	676.53	09/20/2018	2930.75	333.20%	2403
12/24/2018	2351.10	02/19/2020	3386.15	44.02%	394
03/23/2020	2237.40	01/03/2022	4796.56	114.38%	454
Average				102.11%
Standard Deviation				87.63%
Average # of Days				686

❮ Swipe left for more

This table shows S&P 500 Corrections & Bear Markets Since 1932. Bear markets are often followed by lengthy recoveries.

Sources: Haver Analytics and Citi Global Wealth Investments as of March 2020. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is not indicative of future returns. Real results may vary. All performance information shown above is hypothetical , not the actual performance of any client account. Hypothetical information reflects the application of a model methodology and selection of securities in hindsight. No hypothetical record can completely account for the impact of financial risk in actual trading. For example, there are numerous factors related to the equities, fixed income, or commodities markets in general which cannot be, and have not been accounted for in the preparation of hypothetical performance information, all of which can affect actual performance. The returns shown above are for indexes and do not represent the result of actual trading of investable assets/securities.

¹ https://www.reuters.com/business/feds-bostic-says-can-do-maybe-two-maybe-three-half-point-hikes-then-assess-2022-05-09/

Market Indicators

Figure 9: U.S. Stock Market Returns and Select Assets

Index	Weekly change in percent	year to date change in percent	12 month change in percent	division yield in percent
Dow Jones	-0.2%	-9.5%	-4.8%	2.0%
S&P 500	-0.2	-13.5%	-1.9%	1.6%
NASDAQ	-1.5%	-22.4%	-10.9%	0.8%
Instrument	Weekly change	year to date	12 month change	Level
10-Year Treasury Yield (%)	19.2 bps	161.6 bps	155 bps	3.13%
Gold ($/Oz.)	-0.7%	3.0%	3.8%	$1,883.3
Oil ($/bbl)	4.9%	42.6%	69.6%	$109.77

❮ Swipe left for more

This table shows returns for various USA equity markets and select assets, in weekly, year-to-date and 12 month changes.

Figure 10: International Stock Market Returns

Index	Weekly change in percent	year to date in percent	12 month change in percent	division yield in percent
Global	-1.5%	-14.7%	-8.6%	2.1%
Europe	-4.1%	-17.2%	-13.5%	3.2%
Japan	0.2%	-15.4%	-16.4%	2.3%
Emerging Markets	-4.1%	-15.8%	-21.3%	2.8%

❮ Swipe left for more

This table shows the US Stock Market Returns and Select Assets and International Stock Market Returns.

Sources: Bloomberg and Citi U.S. Wealth Management as of May 6, 2022. Note 1 (Equities): Global = MSCI All Country World Index (USD); Europe = MSCI Europe (USD); Japan = MSCI Japan (USD); Emerging Markets = MSCI Emerging Markets (USD). The equity index returns shown here are based in U.S. dollars. Returns for a non-U.S.-based investor can differ significantly depending on the effects of foreign currency exchange. Note 2 (Instrument): Gold = U.S. dollars per Troy ounce; Oil = West Texas Intermediate crude at Cushing, OK. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is not indicative of future returns. Real results may vary.

The Week Ahead

Figure 11: U.S. The Week Ahead

Date	Time	Event	Period	Consensus	Prior
5/10	6:00	National Federation of Independent Business Small Business Optimism	April	92.9	93.2
5/11	8:30	Consumer Price Index Month over Month	April	0.2%	1.2%
5/11	8:30	Consumer Price Index Ex Food and Energy Month over Month	April	0.4%	0.3%
5/11	8:30	Consumer Price Index year on year	April	8.1%	8.5%
5/11	8:30	Consumer Price IndexEx Food and Energy year on year	April	6.0%	6.5%
5/13	10:00	U. of Mich Sentiment	May P	64.0	65.2

This table lists a number of key economic events, analysis reports and forecasts from influential institutions.

Sources: Bloomberg and Citi Global Wealth Investment as of May 6, 2022.

Explore Investing with Citi

Ways to Invest

Invest the way that works for you - on your own, with an advisor or a combination of both.

Learn More on Ways to Invest
Investment Products & Services

Explore the range and depth of what we offer to support your investing and insurance needs.

Learn More on Investment Products and Services
Financial Planning

Work with a dedicated team to create a complimentary, personalized financial plan.

Learn More on Financial Planning

Important Information for You to Know About Our Business and Relationship With You

We are required to deliver two important disclosure documents about our business and relationship with you:

Form Client Relationship Summary ("Form CRS") is a brief summary of the brokerage and advisory services we offer.
Regulation Best Interest Disclosure Statement and Related Information for Retirement Accounts is a more detailed description of the brokerage services we offer and our obligations under Regulation Best Interest when we make recommendations to you as your broker-dealer.

Please review both of these important documents online at http://www.citi.com/investorinfo/. If you prefer paper copies, Please contact your advisor or call us at (800) 846-5200 | TTY: We accept 711 or other Relay Service.

Highlights

Keeping an Eye on Inflation

Market Indicators

The Week Ahead

Watch Video

Mid-Year Outlook 2022 Webcast with Shawn Snyder and Kris Bitterly (57:42)