Author: admin

The stock market rallied on Friday, breaking a three-week losing streak. No apparent news can account for the rally, but it was a stark reversal of the 5.8 percent loss on the S&P 500 the week prior.

Gains accelerated into the final hour of trading on Friday, with the Dow Jones Industrial Average up 826 points or 2.7 percent. The Nasdaq gained 3.3 percent, and the S&P 500 closed 3.1 percent higher.

The major stock market averages staged a big comeback and recorded the first positive week for the markets this month. For the week, the Nasdaq was up 7.5 percent, the S&P 500 gained 6.5 percent, and the Dow was up 5.4 percent.

Some market researchers believe Friday’s big rally was a bear market rally with deeply oversold conditions and bargain buying. They think the overall trend is still downward with the continuing worries about recession and earnings being revised down.

Federal Reserve Chairman Jerome Powell told Congress on Wednesday that the Fed is determined to bring down inflation. Their goal is to restore price stability and fight inflation, and they have the tools to accomplish this task.

Powell also states that economic conditions are generally favorable with a strong labor market and a continual high demand. Senator Elizabeth Warren, D-Mass., voiced her main concern to the Chairman their rate hikes could tip the economy into a recession without stopping inflation.
Chairman Powell did say that a recession is certainly a possibility, but that is not their intended outcome.

The events Powell was referring to are mainly the war in Ukraine, supply chain problems, and commodity prices. Many of these events are factors the Federal Reserve cannot control, making a soft landing more difficult.

He was also asked to comment on the current real estate market and housing prices. Powell believes that even though mortgage rates have been low due to the pandemic, they are now getting back to more normal or above normal levels. He is not sure what this will do to housing prices.

He mentioned that the inventory of finished homes for sale is still historically low, and there is still a very tight housing market. Describing the market as a complicated situation, he also said that something needs to change so more people can start to climb the real estate ladder.

Powell said, “We need to get back to a place where supply and demand are back together. And where inflation is down low again and mortgage rates are low again. So this will be a process whereby ideally we do our work in a way that the housing market settles in a new place and housing availability and credit availability are at appropriate levels.”

He acknowledged that for those looking to buy a home, we need a bit of a reset, though he declined to elaborate on what a reset would look like.

The sales of existing homes fell in May by 3.4 percent. These readings are based on closings during May and represent contracts signed back in March and April.

Home sales in May were 8.6 percent lower than in May 2021 and the lowest since June 2020, when the country was closed down due to the pandemic. Home sales are expected to continue dropping because of higher mortgage rates, high home prices, and low supply.

The median price of a house reached $407,600 in May, an increase of 14.8 percent from a year ago. That median price is the highest price recorded since tracking prices began in the late 1980s.

Houses are still selling quickly, with the average time on the market of 16 days, the lowest on record. All-cash sales are at 25 percent of all sales, and investors accounted for 16 percent of all transactions.

First-time home buyers made up only 27 percent of all transactions, down from 31 percent at this time last year. To make matters worse, rents continue to rise, making first time purchases even more challenging. The average fixed rate on a 30-year mortgage stands at 5.81 percent.

As we approach the mid-point of the year, stocks are about to record their worst first half of any year since 1970. Stocks are down 21.1 percent, and bonds are down 11.1 percent for the year. Commodities are up a staggering 32.4 percent for the year compared to a yearly average increase of 2.4 percent.

Normally, a diversified portfolio will hold both stocks and bonds, with bond holdings limiting losses. But this year, the bond market has also sold off, with the 10-year Treasury yield doubling in six months. The 10-year hit 3.58 percent on June 13th for a new current cycle high. It has since dropped to a close of 3.138 percent on Friday.

It was another weekly loss for the stock market, with all major stock market indexes finishing in the red. The driving force behind the losses was inflation, the Federal Reserve, and the fear of a recession.

On Tuesday, the Bureau of Labor Statistics reported that wholesale prices continued to climb in May, adding to the inflationary pressures on the markets. The headline producer price index (PPI) increased 0.8 percent for May and is at 10.8 percent year-over-year.

May’s increase was in line with estimates and doubled the April increase of 0.4 percent. The producer price index is a measure of prices paid to the producers of goods and services.

Excluding energy, food, and trade, the core PPI increased 0.5 percent for May, a little below the 0.6 percent that was estimated. Year-over-year, the core PPI is up 6.8 percent. The producer price index and core PPI continued at near historical highs of 11.5 percent for the headline PPI and 7.1 percent for the core PPI, which occurred in March of this year.

On Wednesday, the Federal Reserve announced a rate hike of 75 basis points, the most aggressive interest rate hike since 1994. This move brings the federal funds rate to the highest it has been since right before the pandemic.

Federal Reserve Chairman Jerome Powell said that he expects another rate hike increase of 50 or 75 basis points at the July meeting but does not expect these aggressive 75 basis point moves to be common.

According to the FOMC member’s expectations, the Federal Reserve’s benchmark will end the year at 3.8 percent, its highest level since late 2007. That is an upward revision of 1.5 points since March.

The economic growth outlook for 2022 was cut significantly. It is now believed that growth will only show a gain of 1.7 percent in GDP, down from the 2.8 percent expectation in March.

On a positive note, it appears economic activity has picked up. Job gains have been strong in the past several months, and the unemployment rate is still low. Economic activity is expected to stay strong even with inflation high.

At first, the markets were not bothered by the announcement as the Dow Jones Industrial Average jumped 400 points, and the Nasdaq was up more than 3 percent. But by Thursday morning, the fear of recession hit the markets again, and the selling picked up.

The sell-off on Thursday didn’t spare any sector, as all 11 market sectors closed in the red. For the day, the Dow Jones Industrial Average closed down 741.46 points or 2.42 percent, the S&P 500 was down 3.25 percent, and the Nasdaq lost 4.08 percent.

The loss on the Nasdaq was the fifth decline of 4 percent or more since the start of May. Even though the markets were fairly quiet on Friday, the S&P 500 recorded its worst week since March 2020.

For the week, the Dow Jones Industrial Average was down 4.8 percent and is now down 17.7 percent for the year. The S&P 500 lost 5.8 percent for the week and is now down 22.9 percent for the year. The Nasdaq lost 4.8 percent last week and is down 27.5 percent year-to-date.

With expectations that the Federal Reserve will be raising rates again, yields on U.S. government bonds hit their highest levels in more than a decade. The yield on the 10-year Treasury note closed at 3.371 percent, the highest close since April 2011. The yield on the 2-year Treasury closed at 3.3 percent, its highest level since 2007.

Both bonds retreated towards the end of the week, with the 10-year closing Friday at 3.23 percent and the 2-year closed at 3.17 percent.

Mortgage rates continued to jump as the 30-year fixed-rate mortgage hit 6.28 percent. One week ago, the 30-year fixed-rate mortgage was at 5.5 percent. Even with the rising mortgage rates, home prices remain at record high levels.

Rising rates and high home prices are causing home builders to have less confidence that they will be able to sell homes if they build them, even though the U.S. is still short 4 million homes to meet the current demand.

Oil dropped to a four-week low last week because of the strong U.S. dollar and worries of a recession. West Texas Intermediate closed the week down 9.8 percent at $108.80 but is still up 44.7 percent for the year.