Market Monitor: April Update
Headlines and Highlights
- Markets suffer big monthly losses: Stocks and bonds extended their historically poor year-to-date performance in April amid worries about inflation, interest rates and the softening economic outlook. The S&P 500 index plummeted 8.8% to go down 13% for 2022, the worst four-month start to a year since 1939. Bond prices fell as investors priced in a series of anticipated future rate increases. April marked just the sixth month since 1977 in which stocks fell more than 5% and bonds declined over 2.5%.
- Fed ramping up inflation fight: The Federal Reserve is poised to raise interest rates more aggressively this week with core inflation as measured by the PCE price index accelerating in March at the fastest pace (6.6%) since 1982. Fed Chair Jerome Powell said “front-end loading” its series of planned rate hikes can help bring inflation down faster, pointing to the likelihood of an unusual half-point increase in its benchmark interest rate on Wednesday. The Fed also has signaled its intention to start reducing its nearly $9 trillion balance sheet this week.
- U.S. GDP slips even as businesses and consumers show resilience: Inflation-adjusted gross domestic product in the first quarter declined by an estimated 1.4% from a year ago, mostly on account of technical factors. The underlying data showed continuing strength in both private investment and consumer spending, which rose 0.7%. The decline was attributed largely to lower retail inventories and a surge in imports, which are subtracted from GDP because they are produced abroad.
Selected Market Returns
- Market volatility continues to be abnormally high this year amid elevated uncertainty over inflation and interest rates in particular. The S&P 500 has swung 1% or more in nearly 90% of trading sessions – mostly lower but also surging higher on many days – putting it on course for the wildest year since 2009, according to Strategas data. We expect stocks to find their footing in the months ahead once there is more clarity about the economic outlook.
- We believe much of the expected rise in interest rates has already been priced into the bond market, and still believe in the efficacy of bonds to serve as a ballast in portfolios despite their historically bad start to the year. However, given the current market environment and certain opportunities, we are seeking to further diversify client portfolios with income-producing assets that have less interest-rate sensitivity.
- A recession remains unlikely this year despite the decline in first-quarter GDP that masked a broader ongoing recovery in the U.S. economy. The manufacturing and service sectors are healthy and consumer spending continues to increase. Recessions do not occur with the labor market as strong as it is currently.
- Corporate earnings for the first quarter reinforce that U.S. companies remain in solid shape in the face of challenges from inflation and the war in Ukraine. Despite high-profile disappointments from Amazon and Netflix, S&P companies overall have posted year-over-year profit growth of 7% as reporting season nears a close. Companies’ earnings and revenue both are beating analyst estimates at a rate above the five-year average, reflecting their resilience.
- Inflation will remain uncomfortably high through the rest of the year, persisting in large part due to consequences of Russia’s invasion of Ukraine and lingering effects of the pandemic. We expect the rate of price growth to peak this spring and then begin gradually edging lower unless challenges within the global supply chain unexpectedly worsen due to the war and Covid-related restrictions in China.
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