Another strong week for risk assets. The S&P 500 added 3.3% last week – its fourth straight week of gains. The index has now recovered half of what was lost in the first half of 2022 and stands at a year-to-date return of minus 10.2%. Following a 3.1% gain last week, the Nasdaq is now technically back in a bull market with the index up 22.6% since June 16th. Overseas, European stocks returned 1.9% while Japanese stocks jumped 2.6%. In fixed income, the 10-year U.S. Treasury yield finished the week largely unchanged at 2.83%.
“Slow fashion” is a growing trend where garment designers consider not only the impact of the entire supply chain, but also the entire product cycle. Investors may wish to adopt a similar mindset when it comes to assessing the economic cycle. While a strong employment report and downtick in the pace of inflation have lifted risk assets further, economic data still seem likely to weaken in the quarters ahead with leading economic indicators continuing to moderate.
Between its peak in 2000 and its eventual bottom in 2002, the Nasdaq experienced four rallies that were over 20% (two of them were over 40%). While the recent rally in U.S. equites is rightfully reflecting the impact of lower bond yields, better-than-hoped for corporate earnings, and hopes of a less aggressive Fed, it may not be reflecting the potential for a notable slowdown or recession. A soft landing remains possible, but we think it’s too early to conclude that the full impact of monetary policy tightening has already been felt. As such, like “slow fashion,” we remain focused on quality stocks and quality fixed income.
Shawn Snyder
Head of Investment Strategy,
Citi Personal Wealth Management
Last Week's Closeof the main usa stock market indices
S&P 5004,280
(3.3%index change up 3.3 percent from last week)
DJIAdow jones industrial average33,761
(2.9%index change up 2.9 percent from last week)
NASDAQ13,047
(3.1%index change up 3.1 percent from last week)
Slow Fashion
We may not know the latest fashion trends, but we do know that “slow fashion” is a movement growing in popularity, and one we think is relevant to financial markets. “Fast fashion” is created without concerns about where the fabric comes from or what types of dyes or chemicals are used in the garment’s creation. “Slow fashion,” by contrast, considers the long-term environmental and human impact of the supply chain and focuses on sustainability and lasting quality.
Since mid-June, risk assets have posted a significant rally as bond yields have come down, corporate earnings have held up, and a slightly slower pace of inflation has led to hopes of a slower pace of rate hikes from the Federal Reserve. These trends have rightfully supported the recent U.S. equity market rally. That said, just like with the concept of “slow fashion,” investors may wish to take a longer-term view and consider the whole of the product (or in this case the economic) cycle. After all, we are trying to decipher what is going to happen in the future, not what happened today or even yesterday. That leaves us with big questions.
First, we are still a long way from the finish line if the Fed remains intent on getting inflation (as measured by the PCE deflator, which stands at 6.8%) back down to its 2.0% inflation target. We were encouraged by the July consumer price index (CPI), which showed headline inflation falling from 9.1% to 8.5%, but gasoline prices were the primary reason for the drop in headline inflation. Easing the pain at the pump is clearly a good thing, but when energy prices are excluded, CPI inflation has been steady at 6.6% for four consecutive months now (see figure 1). That reflects offsetting trends below the headline with used car prices and airfares coming down while shelter and food prices are still on the rise. We suspect that July’s one-month decline is not sufficient for the Fed to declare victory. Most likely they will want to see a broader and more sustained decline in both goods and services prices.
Figure 1. U.S. Consumer Price Index (Year-on-Year Percent Change)
This line chart shows the year-on-year percent change of the U.S. Consumer Price Index from January 2019 to July 2022.
Sources: Haver Analytics and Citi Global Wealth Investments as of July 2022.
Importantly, the net percentage of small businesses reporting that they intend to raise prices has come down steadily – falling from 52% in March 2022 to 37% in July 2022, but the percentage is still higher than during any other time pre-COVID (see figure 2).
Figure 2. Net Percentage of Small Business Planning to Raise Average Selling Prices
This line chart shows the Net Percentage of Small Business Planning to Raise Average Selling Prices from 1987 to 2017.
Sources: Haver Analytics and Citi Global Wealth Investments as of July 2022. Note: Shaded regions denote periods of U.S. recession.
Second, while the blowout July jobs report, likely confirms that the U.S. economy is not in a recession, it doesn’t mean we can completely rule one out down the road. Importantly, leading economic indicators will likely weaken further as the Fed continues to tighten monetary policy (see figure 3).
A lot will depend on how sticky inflation proves to be and the Fed’s response to that data. A 50 basis-point rate hike at the September meeting seems more likely than a 75 basis-point rate hike following the better-than-expected July CPI print, but the July employment report might give policymakers the confidence to tighten even further given the labor market’s continued strength. The inherent risk is that coincident employment data tell investors little about the future with recessions almost always starting when the unemployment rate is low (see figure 4). The Fed still appears to be on the move and the bulk of the impact of monetary policy tightening is yet to be felt. So, in our view, investors may wish to remain cautious and focused on both quality stocks and quality fixed income (particularly stocks with stable dividend growth).
Figure 3. U.S. Leading Economic Indicator Index vs. Real Gross Domestic Product (YoY%)
This line chart shows the U.S. Leading Economic Indicator Index vs. year-over-year percent of Real Gross Domestic Product from 1986 to 2021.
Sources: Haver Analytics and Citi Global Wealth Investments as of June 2022. Note: Shaded regions denote periods of U.S. recession.
Figure 4. U.S. Unemployment Rate (%) vs. Periods of U.S. Recession
This line chart shows the U.S. Unemployment Rate in percent vs. Periods of U.S. Recession from 1948 to 2020.
Sources: Haver Analytics and Citi Global Wealth Investments as of July 2022. Note: Shaded regions denote periods of U.S. recession.
While the Nasdaq has officially entered a bull market having rallied 22% off of its lows, between the end of 1999 and the end of 2002, the Nasdaq experienced at least four separate 20% intra-year rallies (a couple of them were 40% rallies) before finally bottoming in October 2002. We don’t think this period is likely to mirror the Tech Bubble – technology companies are much more profitable and mature now than they were then – but it underscores the point that bear market rallies are not unheard of and do not always imply that market volatility is a thing of the past (see figure 5).
Figure 5. NASDAQ Composite Index Between 1998 and 2004
This line chart shows the NASDAQ Composite Index Between 1998 and 2004.
Sources: Haver Analytics and Citi Global Wealth Investments as of January 1, 2004. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only. Past performance is no guarantee of future returns. Real results may vary.
What Should U.S. Investors Watch in the Week Ahead?
Investors will get fresh reads on the housing sector with home builder confidence and housing starts set to be released. Industrial production and retail sales for the month of July will also be reported. The retail sales report will provide a timely update on the U.S. consumer. The Federal Reserve will also publish its July 27 Federal Open Market Committee (FOMC) meeting minutes.
Market Indicators
Figure 6: U.S. Stock Market Returns and Select Assets
Index
Weekly Chgchange in percent
YTDyear to date change in percent
12 Months12 month change in percent
Div. Yield division yield in percent
Dow Jones
2.9%
-7.1%
-4.9%
2.0%
S&P 500
3.3%
-10.2%
-4.1%
1.5%
NASDAQ
3.1%
-16.6%
-11.9%
0.8%
Instrument
Weekly Chgchange
YTDyear to date
12 Months12 month change
Level
10-Year Treasury Yield (%)
0.4 bps
132.1 bps
147 bps
2.83%
Gold ($/Oz.)
1.5%
-1.5%
2.8%
$1,802.4
Oil ($/bbl)
3.5%
19.6%
33.3%
$92.09
❮ 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 7: International Stock Market Returns
Index
Weekly Chg change in percent
YTD year to date in percent
12 Months12 month change in percent
Div. Yield division yield in percent
Global
2.8%
-12.9%
-10.5%
2.1%
Europe
1.9%
-17.7%
-17.9%
3.4%
Japan
2.6%
-15.3%
-16.5%
2.4%
Emerging Markets
1.6%
-15.7%
-18.9%
3.2%
❮ 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 August 12, 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 8: U.S. The Week Ahead
Date
Time
Event
Period
Consensus
Prior
8/15
8:30
Empire Manufacturing
AugAugust
5.0
11.1
8/15
10:00
NAHBnational association of home builders Housing Market Index
AugAugust
54.0
55.0
8/16
8:30
Building Permits
JulJuly
1640kthousand
1685kthousand
8/16
8:30
Housing Starts
JulJuly
1529kthousand
1559kthousand
8/16
9:15
Industrial Production MoMMonth over Month
JulJuly
0.3%
-0.2%
8/17
8:30
Retail Sales Advance MoMMonth over Month
JulJuly
0.1%
1.0%
8/17
8:30
Retail Sales Ex Auto and Gas
JulJuly
0.4%
0.7%
8/17
14:00
FOMCfederal open market committee Meeting Minutes
7/27/2022
--empty
--empty
8/18
8:30
Philadelphia Fed Business Outlook
AugAugust
-5.0
-12.3
8/18
10:00
Existing Home Sales
JulJuly
4.88mmillion
5.12mmillion
8/18
10:00
Leading Index
JulJuly
-0.5%
-0.8%
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 August 12, 2022. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee of future. Note: “A” means actual reported figure.
Shawn Snyder
Head of Investment Strategy,
Citi Personal Wealth Management