Market In A Snap! June 27th – July 1st, 2022

By: Jeff Anderson, CFA

 CloseWeekly returnYTD return
S&P 5003,825.33-2.21%-19.74&
Nasdaq Composite1,127.85-4.13%-28.87%
Russell 2,0001,727.76-2.15%-23.05%
Crude Oil$108.461.29%43.75%
US Treasury 10yr Yield2.894%-24.2%138.0%

Source: Wall St. Journal

Market Wrap:

Thursday marked the end of the first half to 2022 and I, for one, will be glad to put it in the rearview mirror. The S&P 500 was down 20%, and the US Aggregate bond market was down 10%. It was the worst first half in 52 years. Stubborn inflation and rising rates, lingering supply-chain issues, along with geopolitical events all weighed on the capital markets. Fed Governor Powell added fuel to the fire yesterday by saying that the Fed had to allow some probability of the US economy falling into a recession as it fights to bring down inflation. Was there any good news? For one, fixed income started acting like a ballast to equities over the past month. Is that because they can see interest rate rises stopping in 2023 or is that recessionary fears typically see investors take risk off and invest in safe-haven assets like US government bonds? Maybe it’s both.

Corporate America will begin reporting profits for the second quarter in a couple of weeks. Profits may have softened. It will be interesting to see what the outlook is for the second half of the year. One thing is certain; economists are divided on where the economy is headed. Some predict a recession this year, while others believe it’s more likely a 2023 or 2024 event. Recessions are inevitable. We will have one in the future. For investors, what is more important is having a diversified portfolio to weather it.

Source: Wall St. Journal

Supply-Chain Issues Still an “Issue”:

GM said it wasn’t able to deliver 100,000 vehicles in the second quarter because it didn’t have computer chips and other parts.  Many of the cars and trucks we see sitting in dealership lots can’t be sold because the vital computer chips aren’t in them. Demand has been strong so far, and coupled with increased costs to manufacture these autos, the average price has increased 15% from last year, coming in at almost $46,000. Surprisingly, auto loan rates are pretty low. the prime rate is 3.56%. Given how aggressive the Fed has been in hiking rates and where mortgage rates are, a sub 4% auto loan is fairly good.

The entire auto industry has been a source of frustration for buyers and manufacturers. Nobody is happy. The annual vehicle sales in the US have averaged 16.7 million over the past 10 years. In the depths of the pandemic, the US sold less than 9.1 million. It peaked at an average annual rate of 18.15 million in March of 2021, but we are still below the long-term average (see chart).

We scrap 12 million cars a year. That’s a lot of recycled metal.  That means that we actually sold less during the pandemic than we actually sent to the grave.  The average vehicle’s age hit 12.2 years. We travel, on average, 12,300 miles a year. The older the car, the more we pay in repairs. We desperately need more production. New cars have warranties, are typically more fuel efficient, and are safer. Waiting for vehicle inventories to normalize just adds to the mismatch between cars “needed” vs cars available.

Source: Ycharts

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