Wednesday, May 11, 2022
U.S. and International Equities
Stocks lost ground in April, reversing all of the March gains as the S&P 500 Index tumbled 8.8%. The latest resinous inflation reports and corresponding hawkish response from the Federal Reserve caused market participants to pull back on risk. Meanwhile, conflict in Eastern Europe and COVID-19 lockdowns in China have some market participants concerned about the state of the global economy, adding to investors’ dour mood. The Nasdaq Composite lost the most ground in April given the interest rate sensitivity of high-valuation segments of the market along with some weakness in first quarter technology earnings.
Almost all sectors lost ground in April with the exception of consumer staples. Consumer staples have now enjoyed a strong showing for three consecutive weeks ending April 22. Investors anticipating an economic slowdown continue to take refuge in this defensive sector.
Both oil and natural gas finished higher in April, as energy continued its dominating run in 2022. Oil’s fundamental case continues to improve due to firm demand outside of China and fears of drawn-out supply disruptions from the Russia-Ukraine conflict and European sanctions. The major metals, gold, silver, and copper, lost ground in April.
Fixed Income Continues Lower
The benchmark Bloomberg U.S. Aggregate Index finished lower for the fourth straight month following negative returns for 2021. Market participants continued to sell off bonds in light of the Federal Reserve’s hawkish sentiment in the face of high inflation. High yield bonds (Bloomberg High Yield Index), which were a bright spot in the fixed income space during 2021, have been negatively impacted by expected higher interest rates as well this year, although credit conditions remain generally benign. Both developed international bonds (Citigroup World Government Bond Index) and emerging market debt (JP Morgan Emerging Markets Global Bond Index) also lost ground for the fourth straight month.
U.S. Economic Data Recap
Inflation: The March headline Consumer Price Index increased by 8.5% year-over-year, the fastest annual gain since December 1981. Increasing food, energy, and housing costs accounted for much of last month’s gain. Core CPI, which excludes food and energy costs, increased 6.5% on an annual basis, while core CPI came in slightly less than economists’ expectations on a month-over-month basis.
The Producer Price Index (PPI) increased as supply constraints continue to linger, leading to its largest annual gain since the series was updated over 10 years ago. For the 12 months through March, PPI increased over 11%. Core PPI, excluding food, energy, and trade services, increased over 7% year-over-year.
U.S. consumer: April’s Consumer Confidence pulled back slightly from its March increase. Consumer confidence came in at just above 107 in April, below economists’ expectations. The Present Situations Index, which is based on consumers’ assessments of present business and labor market conditions, also declined. The expectations index short-term outlook for income, business and labor market landscape did however all nudge slightly higher in April.
Retail sales: Retail sales for March came in slightly below economists’ expectations and increased fractionally in comparison to February. The largest gain in last month’s retail sales was seen at gas stations, which saw an 8.9% increase in sales as gasoline prices rose over 18% for March. Online sales showed a steep decline, receding almost 6.5% compared to February. Across the board, retail sales increased almost 7% from March 2021.
U.S. home sales: For the month of March, existing home sales dropped almost 3% on a month-to-month basis and 4.5% on a year-over-year basis. The final inventory of unsold homes increased to 950,000 as the median home price ended March at just over 375K. This is up 15% from March of last year and is the 121st consecutive month of year-over-year increases, which is a new record. Higher home prices and mortgage rates appear to be causing buyers to delay home purchases.
Small business sentiment: The National Federation of Independent Business (NFIB) Small Business Optimism Index fell to another 12-month low in March amid persistent worker shortages and higher prices for materials. In addition, more than a quarter of businesses cited inflation as their largest problem, the highest since 1981. Scarce workers and rising labor costs remain the main areas of worry for businesses, as they have been since the early part of last year.
Federal Reserve news: In March, the Federal Reserve published its Federal Open Market Committee minutes from February. The minutes revealed the Committee’s interest in starting quantitative tightening (QT), allowing the Fed’s balance sheet to contract and do QT much faster than the previous round five years ago. The Federal Reserve’s bond holdings could decline by as much as $95 billion a month, however this would not happen for a few more months as their plans become finalized. The most recent employment report was strong enough to support a 50 basis point hike in rates at the May meeting and possibly at the June meeting.
U.S. employment: U.S. businesses added over 420,000 jobs in April and, after revisions, matched the same pace as last month. The unemployment rate was unchanged at 3.6%, which is keeping the present labor market tight. Moreover, the number of people on temporary layoffs is approximately the same as February 2020, before the onset of COVID-19.
As we continue through the economic recovery, geopolitical conflict in Eastern Europe along with COVID-19 lockdowns in China have investors concerned about the global economic landscape. On top of this, inflation is proving stickier than many anticipated. The Fed’s hawkish view, along with the bond market, has affirmed this.
Market participants are presently weighing the effects of all these factors, leading to higher volatility in financial assets. Presently, amid these challenges, S&P 500 Index company fundamentals appear intact. Our base case continues to be that inflation should begin to stabilize once supply chains are fully operational and labor shortages ease. In addition, in our view, the health of the consumer should continue to be an important driver for the economy and corporate profits in 2022.
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