The Asset Guidance Group Weekly Update For the week ending May 6, 2022

Recent Highlights

  • Nonfarm Payrolls increased by 428,000 (05/06)
  • Unemployment Rate remained at 3.6% ( 05/06)
  • Average Hourly Earnings increased by 0.3% (05/06)
  • Average Workweek remained at 34.6 (05/06)

Market Highlights

Wall Street routed on Thursday, erasing all gains of the previous day. Market participants remained highly concerned regarding a series of aggressive rate hike as signaled by the Fed. A large section of investors remained skeptical about the U.S. economic growth in 2022. These negatives significantly dented market participants’ confidence. All three major indexes plummeted.

How Did the Benchmarks Perform?

The Dow Jones Industrial Average (DJI) tumbled 3.1% or 1,063.09 points to close at 32,997.97. Notably, all components of the 30-stock index ended in negative territory. The blue-chip index has registered its worst single-day performance since Oct 28, 2020.

The tech-heavy Nasdaq Composite finished at 12,317.69, plunging 5% or 647.16 points due to the disappointing performance of large-cap technology stocks. The tech-laden index has posted its worst daily performance since Jun 11, 2020 and lowest closing since November 2020.  

Meanwhile, the S&P 500 tanked 3.6% or 153.30 points to end at 4,146.87. The broad-market index has recorded its worst daily performance year to date.  All 11 broad sectors of the benchmark index closed in negative zone.

The Consumer Discretionary Select Sector SPDR (XLY), the Financials Select Sector SPDR (XLF), the Materials Select Sector SPDR (XLB), the Technology Select Sector SPADR (XLK) and the Communication Services Select Sector SPDR (XLC) rallied 5.6%, 2.9%, 3.1%, 4.8% and 3.7%, respectively.

The fear-gauge CBOE Volatility Index (VIX) was up 22.7% to 31.20. A total of 13.45 billion shares were traded Wednesday, lower than the last 20-session average of 12.01 billion. The S&P 500 recorded two new 52-week highs and 43 new 52-week lows. On the other hand, the Nasdaq Composite posted  20 new 52-week highs and 446 new 52-week lows.

Wall Street Melts Down on More Rate Hike Fear

On May 4, the Fed hiked the benchmark interest rate by 50 basis points effective immediately. Notably, the Fed raised the lending rate by 25 basis points in its March FOMC, for the first time in more than three years. With this decision, the Fed fund rate has increased to 0.75-1%.

Fed Chairman Jerome Powell hinted that 50 basis points rate hike is likely to come in next two FOMC meetings. At present, the CME FedWatch data indicates the Fed fund rate to reach 2.75-3% by the end of 2022.

Moreover, the central bank decided to shrink the size of its $9 trillion balance sheet in a phased manner affective Jun 1. Initially, the central bank will roll off $30 billion of Treasury Notes and $17.5 billion on mortgage-backed securities per month. After three months, the size of Treasury Note will increase to $60 billion and mortgage-backed securities will increase to $35 billion per month.

Market participants are concerned that if these measures failed to contain inflation, then the Fed will be compelled to raise interest rate by 75 basis points. The global supply-chain system is showing no signs of restoration. Lingering war between Russia and Ukraine and the resurgence of COVID-19 infections in China significantly delayed the process.

Investors are concerned that higher input costs and shortage of labor will raise the price of final products. Higher interest rate regime will also result in lower business spending. Finally, mounting inflation will force Americans to cut personal expenditures. The end result may lead to economic recession.

On May 4, the yield on the benchmark 10-Year U.S. Treasury Note touched 3.106%, its highest since 2018. It finally closed at 3.04%. The yield on 30-Year U.S. treasury Bond closed at 3.126%. As a result, shares of tech behemoths like Apple Inc. (AAPL), Meta Platforms Inc. (FB) and Alphabet Inc. (GOOGL) plummeted 5.6%,  6.8% and 4.7%, respectively. All three stocks carry a Zacks Rank #3 (Hold). 

Economic Data

The Department of Labor reported that weekly jobless claims increased 19,000 to 200,000 for the week ended Apr 30. The consensus estimate was 181,000. Previous week’s data was revised upward from 180,000 to 181,000. Continuing claims (those who have received unemployment benefits) fell 19,000 to 1.38 million for the week ended Apr 23, marking the lowest level since Jan 17, 1970.

Nonfarm productivity declined 7.5% in first-quarter 2022, reflecting its fastest fall since third-quarter 1947. The consensus estimate was for a drop of 4%. Previous quarter’s data was revised downward from 6.6% to 6.3%. Unit labor cost jumped 11.6% in first-quarter 2022, marking its biggest increased since third-quarter 1982. The consensus estimate was 9%. Previous quarter’s data was revised upward from 0.9% to 1%.

Source:  Zacks Professional Services, “Today’s Key Market and Economic News” for Friday May 6, 2022.

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