This week, Tom Weary, CFA®️, reviews recent market volatility, discusses current consumer sentiment, and shares the latest earnings report from RFA portfolio holding Nike.

Transcript

Welcome to the Weekly Market Update.  This week marked the end of the second quarter and thus the midway point in 2022. It has been a challenging year for investors with the stock market down roughly 20% from its record high on January 3rd. Figuring out the direction of the economy is also proving to be a challenge to investors. We will take a look at these topics today as well as the latest earnings from Nike, so let’s jump right in without further ado. 

The stock market has been extraordinarily volatile this year for a host of reasons. As we can see in this first chart, just last week we had a very strong move up of almost 6 ½%, but this followed two weeks of strong downward movements. As we can see in the chart, 2022 has been far more volatile then last year. We have to remind ourselves that stocks are supposed to be volatile, which is why they earn us higher returns. The problem is that it isn’t any fun while it is happening. We must also keep in mind that the largest positive returns always follow the big downdrafts, so the most dangerous strategy is to try to cut your losses and therefore miss the big surge that follows. Studies have shown that it is human nature to look at the past six months and extrapolate that experience into the next five years, but I can assure you that the next five years in the stock market are not going to resemble the past six months. It just feels that way right now. 

Investors have been fixated upon the question of whether economic growth is slowing too much. While the U.S. economy was on fire last year, it now appears to be slowing rather suddenly. This first chart of U.S. Manufacturing Purchasing Managers Index clearly shows a steep drop in activity with the latest reading for June being below expectations. Likewise the next chart shows that the far larger Services sector of the economy has also slowed abruptly, with the latest reading for June being below expectations. There does appear to be the divergence between businesses and consumers. As we see in the next chart, Capital Goods New Orders Nondefense ex Aircraft, which is a good proxy for private investment, shows good growth in May which was above expectations, implying that corporate executives are optimistic about the future. However as we see in this final chart, consumers don’t see it that way, with the University of Michigan June reading for Consumer Expectations being at its lowest level since 1980. We may be talking ourselves into a recession given the importance of the consumer to the economy. Perhaps we should recall the words of the Roman senator Seneca that we are harmed more by fear of the thing than the thing itself. 

On Monday, Nike, a holding in both the Core Defensive Portfolios, reported results that beat on both the top and bottom lines. Nike earned 90 cents a share on revenue of $12.2 billion. Wall Street had expected Nike to earn 81 cents a share on sales of $12.1 billion. Greater China remained a drag, with revenue off about 20%, while Nike’s North America business was off 5%. That said, the company notched double digit sales gains in other regions. Nike has long been a powerhouse, rising nearly 90% in the past half decade, ahead of the S&P 500’s 60% gain. And there have been plenty of years when it has easily outpaced its consumer discretionary peers as well, with the stock reaching all time highs during the pandemic. Analysts have been concerned about ongoing demand destruction from large scale lockdowns amid China’s zero COVID policy. High apparel inventory at other stores have also sparked worries of widespread discounting. Therefore, a top and bottom line beat was welcome news for investors, given such a mixed earnings season for consumer companies, even if Nike still faces headwinds.  

So, what does it all mean?  A hawkish Fed fighting the worst inflation in 40 years combined with a war in Eastern Europe roiling commodities markets,  has led to an extremely volatile stock market this year and one of the worst bond market performances in history. While it is hard on the nerves as we endure it, we have to keep reminding ourselves that such volatility is not only normal but healthy for the stock market. Nobody knows when the volatility will end, but we do know that it will end. In the meantime, your companies will continue to post strong results, as we saw with Nike this week. So please, sit back, relax, have a great weekend and join us next time for the weekly market update. 

 

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