Market Update May 2, 2022

Photo by Tim Mossholder on Unsplash

Economic data for the week included a surprisingly negative U.S. GDP result for the first quarter. Housing data was mixed, with slower sales, but home prices reached record highs. Consumer sentiment fell back a bit, but durable goods rose, and jobless claims remained positive, and near multi-decade lows.

Global equity markets fell back sharply last week, due to mixed earnings reports, high commodity prices, slowing growth, and Ukraine concerns. Bonds were little changed in the U.S., but were negatively impacted abroad by an especially strong U.S. dollar. Commodities were mixed, with higher energy prices offsetting declines in metals.

U.S. equities experienced a volatile week, falling back near -15% correction territory from peak levels, with April returns coming in as the poorest month since March 2020. Results during the week were largely driven back and forth by earnings news during one of the busier reporting segments for S&P 500 companies. Stocks bounced back slightly early on, partially driven by positive sentiment (for non-financial reasons to some extent) surrounding Elon Musk’s bid for Twitter, before suffering again early in the week with additional bad news from China—lockdowns were continuing with the potential for spread to Beijing and other cities. Most directly, the zero-Covid policies in China have cut manufacturing and shipping activity dramatically, which continues to have far-reaching global consequences. However, the Chinese government has been moving toward additional simulative measures in attempts to offset the slowdowns, counter cyclically to most other world nations at this stage. Increasing nuclear rhetoric from Russia, in response to Ukrainian weapons shipments and severe sanctions, also weighed on sentiment.

Every industry sector lost ground for the week, with consumer discretionary declining over -7% (led downward by Amazon following a poor earnings report, and Tesla, with worries over potential owner distractions and stock technicals in the acquisition of Twitter), followed by financials and communications. Leaders were a mixed bag of energy and materials, with sustained minimal losses for the week in keeping with their recent leadership, as well as technology and consumer staples. Real estate also declined over -5% for the week.

Foreign stocks were mixed, with emerging markets ending flat for the week and Japan faring well, with minimal losses, outperforming Europe and U.K. European governments are contemplating additional sanctions against Russia, as well as cultivating plans to wean off petroleum imports from the region entirely (timeframe to be determined). The re-election of French president Macron provided a bit of relief to markets uncertain about policies of the potential replacement Le Pen. In emerging markets, returns were all over the board, with declines in Brazil, Mexico, and Asia, offset by gains in China. As mentioned, due to Chinese economic weakness, news from government meetings has focused on fiscal stimulus, including tax cuts, new infrastructure plans, and consumption support.

As of Friday, per FactSet, 55% of S&P firms have reported Q1 earnings results. Although it might be a surprise considering recent market volatility, 80% of firms have reported a positive surprise on the earnings side, and over 70% on the revenue side. Earnings growth on a year-over-year basis is just over 7%, which is close to the 30-year average, but below the 9% average rate of the past ten years. Recent weaker price activity and better earnings have brought the 12-month forward P/E to 18.1 (above the 10-year average of 16.9). Interestingly, due to the concentration of the larger members of the S&P, if Amazon were excluded, earnings growth would have risen to over 10%. Of course, this pales in comparison to the year-over-year number of over 90% from March 2021, which reflected the impact of Covid in both directions, but remains solidly expansionary.

Stock market volatility rattles many investors, as it the first worry is often ‘crash’, but underlying context is helpful. If one believes that financial markets are at least partially ‘efficient’, securities prices on any given day should reflect the net effect of all investor opinions: bullish, bearish, and neutral. If there is seeming agreement on or at least stability in broader fundamentals, such as future earnings growth, inflation, interest rates, commodity prices, or geopolitics, market prices are less likely to see extreme day-to-day movement. However, when there is greater disagreement on near-term outcomes, or a wider span of possibilities (good and bad), the ‘price discovery’ function of markets takes over, creating greater volatility. This may last for a short time or longer, based on the uncertainty of the underlying inputs. Note that this is different than a ‘crash’, which is tends to exhibit a sell-first-and-ask-questions-later behavioral panic, where such a probabilistic evaluation is not conducted in that short a time span. Obviously, today’s inputs include a variety of data to digest, such as the Ukraine war and impact on commodity prices and inflation, not to mention chances of a wider conflict, underlying inflation prior to the war, Covid continuing into an endemic stage (it seems) but including Chinese lockdown duration, central bank monetary policy, and the impact of all onto upcoming economic growth and corporate earnings. There is a lot here to digest, and conditions continue to change by the week, causing prices to change in line with changing news and assumptions.

U.S. bonds were stable last week, as interest rates calmed a bit, perhaps with a bit of buying pressure from flows away from equities. Treasuries earned positive returns, outperforming both investment-grade and high yield corporates, which lost a bit of ground, along with a typical positive correlation of credit spreads to equity prices. Foreign bonds lost a percent or more in both developed and emerging markets, with rising rates and the U.S. dollar gaining another two percent for the week. The U.S. dollar has reached another peak not seen since 2016, largely due to ‘carry’ considerations. For example, as the U.S. Federal Reserve has moving to a higher rate regime, large investors looking for places to park spare cash will choose a higher-rate environment, rather than a static low-interest rate currency like the Japanese yen or euro.

Commodities were mixed for the week, with gains in energy offset by declines in industrial and precious metals. The price of crude oil rose by over 2% to nearly $105/barrel, and natural gas prices rose another 9%. The surge in natural gas was on the heels of global supply concerns following Russia’s stoppage of exports to Poland and Bulgaria as a punishment for their refusal to pay in rubles. Natural gas supply dynamics have been one of the largest wildcards affecting the European economy over the past two months, and it’s expected will continue to be so.

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.