Weekly Market Update: June 13, 2022
The U.S. economy remains in relatively good shape, as highlighted by the May employment report. According to the Labor Department, 390,000 nonfarm payroll jobs were added last month, which was lower than the April tally, but stronger than the consensus forecast. The headline unemployment rate held steady at 3.6%.
The jobs report also showed hourly earnings rose 5.2% year over year. That, along with other elevated measures of inflation, should justify further monetary tightening by the Federal Reserve. The next decision, a likely half-point hike to the benchmark short-term interest rate at this month’s Federal Open Market Committee meeting, was scheduled to take place shortly after this report went to press. Going forward, the central bank will have a challenge in seeking to contain inflation without pushing the economy into a recession.
Meanwhile, the corporate profit outlook will be closely watched by Wall Street. In a few weeks, the second quarter will draw to a close, and for the most part earnings are expected to advance at a modest (mid-single digit) pace. However, major companies’ predictions will be of the utmost importance. Of note, we have already received some negative commentary from a handful of prominent CEOs, suggesting that employee cutbacks and other defensive measures are on the horizon.
The stock market remains quite volatile. As May closed, the broader averages, though, did manage to stage a constructive rally, possibly signaling that the market might be stabilizing. It is probably too early to know if the latest rally was merely some bargain hunting, or if a sustained leg up will develop. Clearly, it would be encouraging to see broader sector participation, and investors returning to the leading technology issues.
Conclusion: While equity valuations (recently at a tad below 17 times 12-month forward-looking earnings) seem more reasonable, and pockets of speculative excess have clearly dissolved, bears would advise not to “fight the Fed,” namely the central bank’s tightening of liquidity. For those with long-term time horizons, there are and will be some good opportunities available. However, volatility ought to be expected.