Historical losing streak as market nears bear market

Thoughts

• Equity markets seek to stabilize following a historically painful stretch that has seen the S&P 500® Index in a seven-week losing streak. This is the fourth time on record that we have seen that (2001 and 1970 had eight, 1980 had seven). Unfortunately, the Index was negative over the next 12-months each time. The Dow’s eight-week losing streak is the longest since 1923. Aggressive growth and technology continue to lead the decline, with eight large companies (Microsoft, Apple, Amazon, Alphabet, Meta, Tesla, Nvidia, and Netflix) accounting for half of the loss this year. The valuation of the S&P 500 has seen a dramatic contraction, as this is the fourth-worst start to a year on record while earnings continue to trend higher.
• Technical indicators continue to reflect the degree of pain experienced by investors. Fund outflows accelerated, with global equity funds losing $5.2 billion and bond funds dropping $12.3 billion. High-yield and emerging market debt were the hardest hit, losing $6.1 billion and $4.3 billion respectively, per Bank of America data. The bank’s “Bull & Bear” indicator fell into “unambiguously contrarian buy territory” due to the severity of the decline and the historically weak sentiment. Liquidity and stress indicators in the bond market are reflecting the risk-off environment and recent flow trends. Bullish sentiment may have temporarily bottomed, with the latest Investors Intelligence report showing improvement from the lowest level in six years.
• Fear rather than fundamentals continues to drive the market downward. Institutional investors are on the sidelines right now as we inch closer to the market bottom, but we’re closely watching retail investors. The real mark of the bottom will be when they rush to the sidelines, prompting institutional investors come back into the market.

News

• Data continues to provide a confusing picture of the health of the economy, with survey data showing a dramatic slowdown, but observational data is still healthy. The Conference Board released April’s look at the Leading Economic Index (LEI), falling 0.3% from April, but up 4.8% from a year ago. This is notable because each recession since 1970 was led by a negative year-over-year reading on the LEI. The group expects GDP growth of 2.3% this year, though 68% of CEOs surveyed are worried that the Fed tightening will spark a recession. The NY Fed’s Weekly Economic Index is consistent with economic growth of roughly 4%, with slowing retail sales and railroad traffic and rising initial unemployment claims. Despite 11 million job openings and just 6 million unemployed, unemployment claims are up 52,000 since the low in March.
• President Biden is considering lifting some tariffs on China to help ease inflationary pressure, driving the yuan to the highest level in two weeks. At the same time, the U.S. announced the framework for a major deal with Asian partners, including Australia, Japan, and South Korea, to counter the power of China and focused on international rules on the digital economy, supply chains, decarbonization, and worker rights. Shanghai has seen Covid cases fall to a two-month low, setting the stage for a return to normal by the end of June.
• Consumer-focused stocks that were punished last week will continue to be in focus this week as are the retailers and consumer staples. Retailers, led by Walmart and Target, were sharply lower on disappointing earnings guidance on inflation, labor availability, and supply chain issues. Another wave of retail earnings is scheduled for this week. The consumer stocks lost $550 billion last week, as inflationary pressure drives purchases from high-margin goods toward lower-margin necessities and services.

What to Watch

• Economic news is plentiful this week, led by new home sales and PMI data on Tuesday, durable goods on Wednesday, revised first-quarter GDP and pending home sales on Thursday, and the PCE deflator (inflation metric preferred by the Fed), personal income and spending, and consumer sentiment on Friday. Fed Chair Powell delivers a speech Tuesday and the minutes from the recent Fed meeting will be released on Wednesday.