Domestic Equity Update:  The Wilshire 5000 Total Market Index, which includes every publicly traded U.S. company, declined $10 trillion in value since the beginning of the year, down from $53 trillion. Equities currently account for about 33% of household wealth – adverse “wealth effect” should be monitored closely.

This year’s stock market correction is showing signs of stabilizing.  I expect the stock market to experience a final and potentially meaningful rally between now and the first quarter of 2023.  Ideally, this rally will take us to new “all-time” highs around SP 5150-5500.  Should this come to fruition, it will likely mark the completion of a strong secular bull market that began in 2009, pausing briefly in 2020 – only to resume shortly thereafter.  Should this final push higher occur in the coming quarters, it will become increasingly prudent for us to begin the process of meaningfully reducing (perhaps eliminating) risk in our investment portfolios.  This risk reduction will initially be achieved by selling “risk” investments (stocks) and increasing our cash holdings.  Don’t fret, we’ve been through this before.  Those prepared with a disciplined and prudent investment strategy will ultimately prevail.

A strong U.S. dollar continues to weigh on multi-national company earnings, making up 40% of the S&P 500 Index. These are companies whose revenue are primarily generated overseas. Increases in inventory, labor costs, and supply constraints continue to weight on corporate earnings projections for the 2nd quarter.

Rates Held Steady In May – Fixed Income Review

Short term and long term Treasury bond yields fell moderately in late May. Such a dynamic may be representative of interest rates beginning to level off after a rapid rise over the past few months. The Federal Reserve indicated that it would raise short term rates again in June and July, but not as much as had previously been expected – this remains to be seen. The average rate on a 30 year fixed mortgage fell slightly in late May to 5.10% from 5.25%, offering some reprieve to homebuyers. Mortgage rates are still well above the 3.11% average at the end of last year. The retreat in U.S. Treasury bond yields spilled over to municipal and corporate bonds, where yields fell modestly for the month. Overall bond prices rose as yields fell for nearly all domestic bond sectors.  Regardless of a possible let up in the Fed’s tightening trajectory (which is unlikely in my opinion), further increases are expected over the next two months along with Fed balance sheet reductions (Quantitative Tightening) which will place additional pressure on rates.

Do growing Inventories Means Lower Prices & Discounts Could Be Coming – Consumer Retail

As the pandemic created supply constraints over the past two years, companies learned to stock up on materials and finished products in hopes of alleviating any future supply chain snags. Now that constraints have lessened and various supply chains have resumed operations, companies have been accumulating raw materials and building a stockpile of finished products at an incredibility fast pace. Historically, increases in inventory levels have been an indication that demand for their goods might be weaning due to a pullback in business and consumer demand. As inventories swell, companies are eager to reduce stockpiles by discounting, which could mean lower prices for consumers.

Credit Usage Heading Higher – Consumer Credit

As pandemic assistance funds vanish, consumers are turning to savings and credit to pay for essentials. With many consumers having exhausted their cash reserves, credit becomes an option. Con­sumers have been tap­ping into sav­ings accumulated from pan­demic stim­u­lus funds in order to keep up with in­fla­tion.

Even though overall wages have risen roughly 6% over the past year according to Labor Department data, the increases are still not enough to keep up with inflation running at over 8%. As households start to experience shortfalls, many resort to credit in order to meet month to month expenses.

Auto loans and credit card debt have seen the largest usage increases as tracked by the Federal Reserve over the past few months. Mortgage debt has also risen, but mostly at the upper end of the credit score scale. Credit scores on newly originated mortgages remain relatively high, reflecting continuing high lending standards by lenders. The median credit score of newly originated mortgages was 776 during the first quarter of 2022. Analysts also believe that median credit scores may possibly begin to fall as consumers tap credit cards and exhaust their cash savings. (Sources: Labor Department, Federal Reserve Bank of New York; Household Debt and Credit Report (Q1 2022)

Global Commodity Prices May Be Signaling That Inflation Is Taming – Commodities Market Update

As heightened commodity prices have stoked inflation over the past year, commodity prices worldwide are now starting to ease as demand for various commodities are alleviating.

The Global Price Index of All Commodities tracks the price of widely traded commodities, including copper, wheat, gold, lumber, and sugar. Broad commodity prices retracted in April after reaching record levels in March, with building and manufacturing related commodities seeing the largest drop. Simultaneously, food related commodities have continued to see rising prices over the past two months. Historically, a drop in building materials is indicative of a broader slow down in economic activity, as home builders and manufacturers prepare for an expected drop in demand. As commodity prices ease, so does inflation, which is a result of the manufacturing industry reigning in prices and trying to stay competitive.(Sources: International Monetary Fund,  Federal Reserve Bank of St. Louis)