May 17, 2022
Market Monitor: May Mid-Month Update
Headlines and Highlights
- Fed steps up rate hikes: The Federal Reserve raised its benchmark short-term interest rate by half a percentage point as expected and set the stage for potentially similar increases at its next two meetings as it takes aim at the highest inflation in 40 years. The Fed’s target for the federal funds rate, which was reduced to near zero for most of the pandemic, is now 0.75%-1% and is expected by the market to approach 3% before year-end. Inflation as gauged by the Consumer Price Index slowed last month for the first time since August but remains elevated at 8.3%.
- Stocks extend losing streak: The market volatility that has dominated 2022 continues with the S&P 500 posting losses in each of the last six weeks, the longest such streak in 11 years. At May’s midpoint, the S&P 500 was down 15.1% year-to-date, the Russell 2000 was negative 19.8% and international developed stocks were down 17.2%. Slumps in taxable (-9.8%) and municipal (-8.1%) bonds reflect markets already pricing in future rate hikes.
- Retail sales keep rising even as sentiment hits 11-year low: U.S. retail sales saw a fourth straight month of gains in April, showing that consumers maintain their ability to spend in the face of high inflation and rising rates. Sales gains were broad-based, led by auto dealers, and represented a 0.9% increase from the previous month. The sales growth came despite a drop in the University of Michigan’s survey of consumer sentiment to the lowest level since 2011.
Chart of Interest
Holding firm: Retail sales, which comprise 30% of GDP, have gained steadily amid challenges.
Sources: St. Louis Federal Reserve, Altair Advisers
Key Takeaways
- U.S. GDP expectations for the second quarter call for modest growth following the economy’s 1.4% contraction in the first quarter. The Atlanta Federal Reserve forecasts growth of 2.5%. Other ‘real-time’ economic models also forecast a solid second quarter, which is counter to some headlines suggesting a looming recession.
- First-quarter corporate earnings have shown increases despite the more challenging inflationary environment. With the reporting season almost complete, nearly 80% of S&P 500 companies have beaten estimates, profits are up 9% from a year ago, and revenue growth has outpaced earnings growth. One cautionary sign is that more than 50 companies have reduced their guidance for the second quarter.
- Inflation as measured by the Consumer Price Index eased slightly in April, reflecting some of the smallest monthly gains since last summer. While the 8.3% annual rate remains at a 40-year high, signs of a slowing pace are consistent with our expectation that inflation will gradually decline over the duration of this year.
- Growth stocks continue to deliver the biggest stock-market losses. The Russell 1000 Growth Index was down 23.7% for the year at mid-month, more than triple the 7.5% decline of the value index, and some stocks that benefited from stay-at-home trends during the pandemic are struggling even more. Growth stocks are now trading at more attractive valuations. While there could be more selling ahead, we believe their long-term appeal remains intact.
- The 10-year U.S. Treasury yield has stabilized after briefly topping 3% for the first time since 2018, retrenching after the latest Consumer Price Index report showed inflation decelerating. Yields may rise further but our base-case scenario is for them to remain range-bound from here for the remainder of the year, easing pressure on bond prices following their rare plunge in the opening months of 2022.
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