It was another brutal week for the market. After a 10% rally from 3800 level 2 weeks ago, the market has been chopping around a defined range for the past 2 weeks. However, in the final hours of Thursday’s session, the markets nosedived on concern about Friday's consumer price index release. The selling accelerated Friday when that price data for the month of May came in hotter than expected, now rising at the fastest clip since 1981 and putting a pin in the narrative of peak inflation. The choppy range was broken down to the downside, and we're very likely to head towards re-testing the 3800 level.

While it is easy to be negative — there are plenty of things to point to — there’s also good reason to be a bit more upbeat and constructive. For starters, we’ve seen positive investor reaction to negative updates from Nvidia (NVDA), Microsoft (MSFT), and Salesforce (CRM). We even saw Target (TGT) recovered some losses after reporting a bad quarter and downward revision to its forecast a few weeks later. 

It’s nearly impossible to call a market bottom and we’re not in the business of trying to do that. But seeing how investors are less fazed by bad news, versus just a month ago, strengthens our conviction to keep searching for opportunities as other investors indiscriminately sell the good with the bad.

Our preference continues to be buying energy and healthcare names. Energy will continue to perform well in the face of inflation, while healthcare is a safe haven in an economic slowdown given the critical nature of its products. We originally thought consumer staples such as Costco and Procter&Gamble should be outperformers in the face of a slowdown too, however, recent reports show that higher expenses are eating up their operating margins. We also see opportunities in technology stocks — which aren’t typically thought of as defensive plays — simply because they’ve become too cheap to ignore. For example, we recently purchased shares of Meta Platforms (META), which is trading at just 14.7 times this year's earnings, a discount to the market. We went heavy in shares of Advanced Micro Devices (AMD), which is even cheaper, trading at 22 times 2022 earnings while growing its revenues at ~60%. On Thursday, AMD held an investor event, and there was nothing less of impressive and assuring from the company's management.

Back to the market, this week, no sectors were able to escape the carnage, with all of them closing in the red, led to the downside by financials, followed by technology and real estate.

The U.S. dollar index popped to over 104. Gold advanced to the upper $1,800-per-ounce region. West Texas Intermediate crude, the American oil benchmark, held at around $120 per barrel. The yield on the 10-year Treasury surged to around 3.15% following that stronger than expected consumer inflation reading. As we’ve noted, the direction of the 10-year yield has been holding the stock market hostage.

Week in review

It’s hard to find stocks and sectors that can hold up in this inflationary environment, which has sparked worries about whether the Federal Reserve can bring inflation down to its target of 2% without sending the economy into a recession.

We believe oil and health care are places to hide. Along with the Meta Platforms and AMD purchases noted above, we bought back the shares of Halliburton (HAL) that we sold earlier in May, an oil technology & services company that will benefit from current drilling activities and anticipated future increases. We re-purchased shares of Eli Lilly that we sold in the $320, looking to buy more of Johnson & Johnson (JNJ). Healthcare companies can be somewhat immune to tough economic times because people still need the medicines and the products that a J&J provides.

In addition to Friday’s CPI, the preliminary June reading for the University of Michigan consumer sentiment index came in well below expectations, hitting a record low. On Thursday, initial jobless claims for the week ending June 4 came in at 229,000, missing expectations of 210,000. On Wednesday, The Fed’s monthly credit report found that revolving credit, which mostly includes credit card balances, jumped nearly 20% in April from the previous month to $1.103 trillion, breaking a pre-pandemic record of $1.1 trillion.

What’s ahead

In the coming week, no club stocks will be reporting earnings. The biggest event of the week will be the Fed’s FOMC meeting that will conclude at 2pm on Wednesday with the interest rate announcement and a 2:30pm news conference from Fed Chairman Powell that follows. The Fed has already telegraphed to the market that there will be two 0.50% hikes in June and July. However, it will be interesting whether they will change their narrative after May's boiling hot CPI numbers, especially any guidance towards what the hike in September will look like. More important factors include their terminal target rate anticipations (i.e. what is the terminal interest rate that they think they will need to bring up to in order to combat inflation).