May 3, 2022
The nature of the economy is that there are always causes for concern in strong markets, just as there are reasons for optimism in weaker ones. It’s fair to say, however, that April made it easier to find the concern than the optimism. Still, we take the view that the headwinds we’ve faced so far in 2022 represent discomfort masking long-term opportunity and a fundamentally tenacious economy.
“While the markets have been focused on the negative, they have ignored the resiliency the economy is showing,” said Raymond James Chief Investment Officer Larry Adam.
That said, it’s wise to acknowledge the prevailing pessimisms:
- The U.S. gross domestic product (GDP) fell at a 1.4% annual rate in the first quarter.
- Inflation remains high, with the Consumer Price Index rising 8.5% over the year ending in March.
- China’s ongoing COVID-19 lockdowns are contributing to supply chain challenges.
- The Russia-Ukraine war will likely continue to cause difficulties.
- Each headline market index was down for the month, with the S&P 500 having its worst day, April 26, since March 2020, falling 2.81%.
A forward-looking view recognizes that at some point we will be able to look back at where we crossed the peak of these difficulties. For some of these issues, there is evidence to suggest that will come soon. The end of this year may look vastly different than its beginning. Here’s why:
- Final sales to private domestic purchasers, a better measure of domestic demand than GDP, rose at a 3.7% annualized rate.
- Month-over-month inflation in April is expected to be milder, lowering the year-over-year inflation rate.
- Supply chain data from the Federal Reserve Bank of New York suggests an easing of disruptions.
- First quarter corporate earnings were strong with 80% of S&P 500 companies that have reported beating estimates.
- Corporate cash on hand is at near record levels, empowering shareholder-friendly policies of stock buybacks and strong dividends.
- Consumers are stronger than ever, sitting on more than $2 trillion in savings.
Before we continue, let’s take a brief look at the 2022 tallies so far.
|12/31/21 Close||4/29/22 Close||Change
Year to Date
|% Gain/Loss Year to Date|
|Bloomberg Aggregate Bond||2,355.14||2,131.31||-223.83||-9.50|
Performance reflects index values as of market close on April 29, 2022.
Here are some other issues worth exploring:
Pressure to overcorrect
If inflation remains at elevated levels, the U.S. Federal Reserve may feel the pressure to further increase interest rates to stabilize prices – its top priority – but at the cost of growth. Clearly, the best result is for this wave to break as other contributing factors ease, which evidence suggests could happen for the latter half of this year. Until then, equities will likely continue to struggle to find footing from which to push forward.
Spreads keep widening
In fixed-income markets, April was all about yield. The continued combination of widening spreads and higher Treasury yields has created yield opportunity for income buyers not seen in decades. The market’s perspective seems to be that high yield spread is likely to be more stable than emerging market spreads, which have a higher probability to widen more.
Limited window of action
The month of April saw the Senate advancing key nominations for top regulatory posts that will have impacts across the technology and financial sectors and may lead to broader macro policy changes over the course of the next several years. By pushing through this docket, the Senate may free up time to consider legislation, including a domestic manufacturing and China economic competition bill, as well as some of President Biden’s other domestic priorities.
Common ground between Democratic factions remains scarce, however, which will complicate the path forward before D.C. shifts focus to the fall election campaign season.
The bottom line
In the near term, volatility will likely remain elevated and equity market weakness may persist as investors grapple with the potential peaks in inflation, bearish sentiments, expectations for central banks and geopolitical tensions.
However, we think that many of these concerns have been priced into the market already. Meanwhile, there is evidence suggesting some of the largest headwinds will ease this year, presenting opportunities to long-term investors.
As always, the market and the world remain in flux and I’ll have an eye on your investments as we navigate the current conditions together. Please contact me with any questions. Thank you for your continuing trust and confidence in these matters.
The Gratz Park Private Wealth Team