With all the recent headlines surrounding the current state of the market and increased volatility, we are taking a deeper dive into key factors that we believe investors should keep an eye on, such as:
Data Points to Remember in a Crazy Market – The U.S. stock market produced some big swings this week, with selling pressure largely attributed to inflation concerns (again) and earnings miss by some major retailers. The retailers reported higher sales but also higher costs, which in our view is not a bad place to be if demand remains firm and inflation pressures ease with time. Regardless, stocks were choppy throughout the week, so we were reminded of two data points that may help put things in perspective. First, we think it is important for investors to note that since 2002, over 85% of the best days in the market occurred after the worst days, which underscores the importance of not making any sudden moves in response to a big down day. The second point is to remember what could happen if an investor tries to time the market and ends up missing some of the best days. Over the 20-year period from January 1, 2002, to December 31, 2021, the S&P 500 index delivered a stout annualized return of 9.52%. However, if an investor missed just the best 10 performance days – which again, often happens in close proximity to the bad days – the annualized return would be cut nearly in half, to 5.33%. An equity investor that spends way too much time on the sidelines and missed the 30 best days would have posted a 0.43% annualized return, which would not keep up with inflation.1
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The U.S. Consumer, Once Again, Remains Largely Undeterred – Elevated inflation remains an issue in the U.S. and around the world, but it is not deterring the U.S. consumer from getting out and spending. In April, retail sales rose a healthy 0.9% month-over-month, which follows a March retail sales number that was revised sharply higher by the U.S. Commerce Department. April’s read-out marks the fourth consecutive month that the U.S. consumer increased spending at stores, in restaurants and bars, and online. To be fair, the retail sales figure does not account for inflation, so higher levels of spending can also reflect higher prices consumers are paying. But it’s also true that there are little to no signs of retrenchment – in April, consumers spent more at restaurants, bars, and for cars, furniture, clothing, and electronics. Americans pulled back on spending on gasoline, but not much else. The shift to spending on goods versus services also appears to be continuing, which could relieve inflationary pressures going forward. Spending at food services and bars is up 19.8% from this time last year and jumped 2% from March to April. Consumers are still spending more on goods for now, but the goods vs. services spending equilibrium is now just a few percentage points away from where it was pre-pandemic.3
Economic Data in China Shows Pronounced Weakness in April – In our view, much of the recent market volatility can be attributed to a growth slowdown in China that took place in April and likely continued into May. China’s government officials have doubled down on stamping out all Covid-19 infections, and as we know from the experience with lockdowns in 2020, economic growth can take a serious hit when businesses shutter and people stay home. In China, retail sales fell 11.1% year-over-year in April, marking the biggest monthly decline since global lockdowns in March 2020. Industrial production also declined by 2.9% for the month, fixed-asset investment fell by nearly 3% from the previous quarter, and China’s urban unemployment rate rose to 6.1%. The question for markets now is whether China is in the process of adding more restrictions or in the process of removing them. Shanghai is scheduled to fully reopen on June 1, but much uncertainty remains over whether some other major hub in China will be next. It’s a factor to watch closely.4
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