Market Update April 11, 2022
Photo by Priyanshu Raj on Unsplash
In a light week for economic data, ISM services sentiment continued to show strength, while the minutes from the most recent March Fed meeting laid out a plan for faster rate hikes and a plan to allow for a balance sheet run-off of treasury and mortgage bonds.
Equity markets in both the U.S. and abroad fell back last week, as interest rates ticked higher and economic concerns weighed on sentiment. Bonds suffered along with rising rates. Commodities were mixed, with gains in agriculture offset by less volatile energy prices last week.
U.S. stocks pushed higher last week, despite few major events, and the upcoming earnings season not having yet started. By sector, leaders were a mix of defensives, such as health care, utilities, and staples, as well as energy, all of which gained several percent on the week. On the other hand, technology, consumer discretionary, and industrials all lost ground during the week, each by several percent. Elon Musk’s substantial investment in Twitter seemed to generate some excitement in growth sectors temporarily. Real estate also gained, despite the challenge of rising rates. Volumes appeared to be lower than average, with the start of earnings season coming up—featuring a likely divergence of results compared to the strength of a year ago at this time. With no real results yet, expectations for year-over-year earnings growth are running just below 5% (compared to almost 50% year-over-year in Q1-2021), but also expected to rebound to an above-average 10% or so for the full 2022 year.
Foreign stocks were in the negative as well last week, with the exception of the U.K., despite (another) wave of Covid cases in the latter. Emerging markets outperformed Europe and Japan, with gains in India coupled with less severe losses in Asia, despite enhanced lockdowns in Shanghai and a few dozen other cities. Sentiment in Europe remained tied to the war in Ukraine, and resulting cuts to economic growth this year. In fact, a recession wouldn’t be out of the question, despite metric such as labor still showing improvement generally.
U.S. bonds fell back again as treasury rates continued to move higher—the 10-year reaching over 2.7%. Yet, treasuries outperformed corporates, due to the change in spreads and sector effects. Floating rate bank loans, however, outperformed sharply, by ending flattish for the week, so at least suffering less damage. Foreign bonds suffered by several percent, with higher rates coupled with a stronger dollar, in both developed and emerging markets. Russian debt lingered on the brink of default, as the U.S. kept the government accessing payment systems—serving to keep the sanctions pressure on due to the damaging effects a sovereign default can have on borrowing ability and demanded rate.
Last week, Fed Governor Brainard noted the Fed is ‘prepared to take stronger action,’ which belied her usual more dovish tendencies. This caused longer-term rates to rise again. These comments also hinted at a ‘rapid’ reduction of the Fed’s balance sheet, which could begin as soon as the May meeting. Longer-term yields, such as the 10-year treasury, are hinged less on current fed funds levels than they are to longer-term inflation and growth expectations. Inflation has lasted longer than expected, but is expected to gradually decline, and long-term GDP growth remains anchored around the 2% level. There are also the cross-currents of a shrinking balance sheet, which takes away the Fed as a large market buyer of treasury debt, but also an underlying concern about rates rising unreasonably, which would escalate U.S. government interest payments. As it stands, estimates of some economists placing a rough ‘fair value’ target of the 10-year of around 2.5% has drifted upward by perhaps a half-percent, due to the faster-than-expected Fed balance sheet runoff.
Commodities were mixed on the week, with declines in energy and industrial metals offset by sharp gains in agriculture (wheat, corn, and soybeans) as well as higher gold prices. The price of crude oil bounced around a bit on the week, before ending down about a percent to just over $98/barrel. Natural gas, on the other hand, spiked by another 10%.
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.