Luma Market Update – 5/23/2022 (6 min)
TRANSCRIPT
OPEN
Investors feeling a lot of anxiety right now… and for good reason. Let us look at what happened and what may lie ahead. From Luma Financial, this is your Market Update.
Hello, this is Albert Lu coming to you from Southern California. Today is Monday May 23.
INTRODUCTION
U.S. markets closed higher today. Heavy selling last week combined with some encouraging comments today from big bank CEOs suggested to some investors that, perhaps, the market correction is overdone. The major averages rose between 1.5-2.0% today — nice relief for battered investors. But will it last? And what should investors be doing?
Let us start by reviewing last week’s action.
Last week was a tough one for investors. The DJIA lost 2.8% for the week. S&P 500 lost 3.0% and the NASDAQ was down 3.8%. But the bad news does not end there:
- Last week’s performance put the S&P 500 into official bear market territory (on an intraday basis) — meaning it fell below 20% of its high
- The weekly loss for the Dow was its eighth consecutive loss (first since 1923)
- NASDAQ [was] down for [the] seventh consecutive week (first since 2001)
- The tech-heavy Ark Innovation Fund has now lost over 50% of its value this year
- And bitcoin, as measured by the Grayscale Bitcoin Trust, is now down 46% (YTD), roughly -65% from [its] high (Nov)
But let us talk about the retailers, the group that took the brunt of the selling.
It all started on Tuesday when Walmart missed analyst expectations for first quarter earnings, bringing in $1.30 per share versus an expected $1.48. The news sent the company’s shares tumbling. The situation worsened on Wednesday when Target also missed expectations. To make matters worse, Ross Stores joined the party on Thursday with earnings miss of its own.
The surprise sent shares of all three companies tumbling. Walmart fell 20% for the week. Target was down 30%. Ross down 22% and Costco, who has not even announced yet, was down in sympathy 16% — They report on Thursday.
The poor results and the accompanying management remarks revealed alarming information about the state of our economy. The Walmart earnings call was particularly illuminating. The company reported double-digit inflation in its food costs which significantly altered consumer behavior. Sales of general merchandise (clothing, electronics, and other non-food items) fell as consumers struggled to keep up with the rising food prices.
The company’s grocery business saw customers shift from name brand items to lower cost, private label alternatives and from gallon containers of milk to half gallon — a reflection of paychecks being stretched too far.
The development is tough news for Walmart but even worse for its competitors. With the consumer unable to absorb further price increases, retailers have no choice but to get lean. But if Walmart, an enormous company that earns pennies on the dollar, is struggling to get there what chance do the others have?
It looks like the pain in retail has just begun.
THE OUTLOOK
Some economists believe stagflation is likely coming, with recession an unlikely possibility.
CEOs of the major banks also stated that they did not think there is a recession in the cards for 2022.
But, to me, in the absence of a sharp policy reversal by the Fed, a recession seems likely.
Reports from Silicon Valley suggest a recession has already begun.
Bottom line: If the Fed is as serious as it sounds about subduing inflation, it has a lot more work to do, meaning higher interest rates and lower stock valuations. In my opinion, the general equity market could very easily fall another 15% or more from here.
CLOSE
No doubt 2022 has been a tough year for investors, but there have been some bright spots. Energy and utility stocks on a whole have delivered handsome returns. And, amid the carnage, gold has held up admirably, delivering a small gain for the year.
Given the prevailing conditions, our near-term strategy at Luma is to focus on value stocks and fixed-income securities in the 1–3-year maturity range as well as gold and other hard asset instruments, while we wait patiently and opportunistically to acquire other high-quality assets at attractive prices.
As always, if you have any questions about current market conditions or your managed account with Luma Financial, please email me at Albert@LumaFinance.com or call my office at 858-367-9107.