Though economic data released last week was mostly strong, stocks fell and yields rose (bond prices down). Good economic news doesn’t always mean good news for stocks and bonds in the very short run. Markets likely interpreted the data as evidence the Federal Reserve will maintain its hawkish policy of raising interest rates and reducing monetary support for the balance of 2022 and into 2023. We were nonetheless encouraged with the economic strength shown in the data, as well as easing price pressures in May demonstrated in the ISM Prices and Average Hourly Earnings numbers. Should we see similar data in the coming months, we think the Fed might not have to be as aggressive as currently anticipated. We will be closely following all of these issues. Meanwhile, here is our take on the May data:

  • The S&P 500 was down 1.15% last week and down 13.23% year-to-date (around 15% from its early January high)1.  We remind investors that since 1980, the average intra-year correction has been around 14%1, so our current correction is near the longer-term average historically. The NASDAQ Index was down 0.96% last week and 22.96% so far in 20224. Our global benchmark, the MSCI ACWI IMI, was down 0.45% last week and is down 13.31% year to date1.  The Bloomberg Aggregate Bond Index was down 0.88% last week and 9.28% year to date1
  • The ISM Manufacturing Purchasing Managers Index (PMI), typically a leading economic indicator, increased in May by 0.7 points to 56.11. Street expectations were for a drop of 0.9 points to 54.51, so the actual data came in much stronger than expected. The ISM estimates this level of manufacturing activity corresponds to solid 2.6% real GDP growth1. This was good news as it shows a resilient economy in the face of inflation and rising interest rates.
  • The ISM Prices Index dropped 2.4 points in May to a still-elevated level of 82.21. However, this is nearly 10 points below its highs in mid-20213, indicating that perhaps we are beginning to see some relief with global supply chain disruptions and less inflationary pressures.
  • The Conference Board’s Consumer Confidence Index fell slightly in May but was also well ahead of expectations1.  Its level of 106.4 in May indicates the economy is slowing but not near recession, in our opinion. Consumer spending makes up about two-thirds of U.S. economic output1, so we pay close attention to confidence numbers.
  • Nonfarm Payroll numbers exceeded expectations too, pointing to ever-tightening labor markets. Payrolls jumped by 390,000 jobs in May, far exceeding consensus expectations of 328,000 new jobs1. Average Hourly Earnings eased from 5.4% year over year growth in April to 5.2% in May1.  Again, good news and highlighting the resiliency of the U.S. economy as it faces high inflation, commodity shocks and rising interest rates.

We think this environment requires patience, balance, and discipline from investors. We do not know exactly when inflation or volatility will subside, so we need to focus on factors we can control. As longer-term investors, not day traders we suggest investors should consider these measures now:

  • Look for opportunities to tax loss harvest while simultaneously increasing the quality of holdings.
  • Rebalance.
  • Maintain diversification.
  • Expect continued volatility in 2022.
  • Stay near “neutral points” with risk tolerance (i.e., if your risk tolerance indicates a 60% stock/40% bond allocation, then stay near that target) and do not try to time market moves.
  • Seek companies that have strong competitive advantages, excellent management, solid balance sheets and generate free cash flow, which should allow them (and you as an investor) to hedge inflation.
  • Seek opportunities for investment-grade yield: since interest rates have moved substantially higher this year, one can now find high-quality bonds that offer attractive yields.
  • Diversify any concentrated positions.
  • Review your financial plan -unless your liquidity needs, time horizon or general financial situation have changed in some way, we suggest that you not make any large changes to your asset allocation.
  • Don’t panic and make rash decisions. Keep calm and carry on - inflation will come down over time, and our economy and markets will be much healthier if we can maintain higher levels of interest rates compared to the last decade or so. 

Thank you for your confidence in our team during this period of volatility,

Asset Management Department

Sequoia Financial Group

Sources:  1.  Bloomberg/Bloomberg News, 2. FactSet, 3. Ned Davis Research, 4. Morningstar Direct


The views expressed represent the opinion of Sequoia Financial Group. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Sequoia believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sequoia’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. Past performance is not an indication of future results. Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Registration as an investment advisor does not imply a certain level of skill or training.

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Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Registration as an investment advisor does not imply a certain level of skill or training.

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