April Recap and May Outlook
In the past month, COVID concerns took a definitive backseat as mask mandates on flights ended, and the concerns about the economy turned to how bad things will get. The concerns over the disruption of the ongoing war in Ukraine, 40+ year record inflation, and the resulting amping up of the Fed’s intentions on rate increases moved distinctly into the foreground. Let’s look at some headlines:
The IMF released projections for the impact of the war in Ukraine. Global growth will likely slow from an estimated 6.1% in 2021 to 3.6% in 2022 and 2023. This projection is 0.8 and 0.2 percentage points lower for 2022 and 2023 than projected in January. Still higher than the average global growth rate over the past 5 years.
The war isn’t just impacting growth. The IMF also reported that war-induced commodity price increases and broadening price pressures have led to 2022 inflation projections of 5.7% in advanced economies and 8.7% in emerging market and developing economies—1.8 and 2.8 percentage points higher than projected last January. Though, oil and other commodities are starting to come down in the US.
In remarks at a panel discussion at the IMF on April 21st, Chairman Powell reiterated that “to be moving a little more quickly” on rate hikes is appropriate. That translated into guidance on the first 50-bps rate increase in 22 years. Hopefully, aligning our US economy with a smooth landing.
Stagflation is high inflation, higher unemployment, and slow economic growth. Stagflation fears arise out of the potential for the Fed to overshoot and tip the economy into recession. In stagflation, the central bank's potential moves to rescue the economy may push it further into recession. In this environment, the Fed may need to tread lightly.
Chairman Powell Steps Up to the Plate – and the Mic
We’ve come a long way from a Federal Reserve that would speak as obtusely as possible and exclusively to economists and bond market investors.
Powell spoke “directly to the American people” in his remarks. He was clear about his view of where inflation is and the Fed’s intention: "Inflation is much too high, and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down.”
Powell was also careful to stake out what the Fed sees as under its purview, instead of governmental control: "It's really the Fed that has responsibility for price stability."
How Did the Markets React?
The increasingly negative numbers all months speak for themselves. And it wasn’t just equities – bond market prices suffered as yields hit levels they haven’t seen in years. However, there were some bright spots.
The 8.5% March inflation number may be the peak. Core inflation, excluding food and energy, fell in March. The Atlanta Fed tracks sticky-price inflation. It increased 5.8 % annualized in March, following a 6.5 % increase in February.
So even though inflation is up, “sticky” inflation is trending down. Added to a strong labor market and an economy that is still growing, even if slower, the potential for both stagflation and a prolonged recession – or any recession – may be lower than headlines are shouting now. After the rate increase on May 4th and Powell’s remarks, the market initially reacted positively as rate increases of 100 basis points over the next two meetings were not as drastic as some feared. However, as rates continue to climb and we see how inflation responds, volatility will continue to be with us. Although, long-term investors should not fear if their portfolios are aligned with their time horizon.
However, it’s essential to keep in mind that the market is healthy, especially as measured by earnings. Q1 2022 earnings are up 8.5% year-over-year, although lower than Q4 2021. The market is down from the all-time high seen in January, but it’s still higher than it was before the pandemic.
The S&P 500 was down 8.80% in April, bringing its YTD return to -13.31%
The Dow Jones Industrial Average lost 4.91% for the month and returned -9.25% YTD
The S&P Mid-Cap 400 decreased 7.18% for the month resulting in a -12.02% YTD return
The S&P Small-Cap 600 declined 7.87% in April, putting the YTD return at -13.34%
The MSCI All Cap World Index declined 7.90% in April, putting the YTD return at -12.86%
Source: All performance as of April 30, 2022; quoted from S&P Dow Jones Indices.
The 10-year U.S. Treasury ended the month at 2.93%, and the 30-year U.S. Treasury ended at 3.00%, up from last month’s 2.45%. The Bloomberg U.S. Aggregate Index was down, returning -3.79%. As represented by the Bloomberg Municipal Bond Index, Municipal bonds returned -2.76%. High-yield corporate bonds struggled with rising rates, with a return of -3.55% for the Bloomberg U.S. High Yield Index.
The Smart Investor:
One point that has been consistently made over the past decade-plus of record stock market returns is that artificially low interest rates have boosted the market. Rates had not recovered to normal levels after the Global Financial Crisis. The pandemic resulted in the second slashing of rates and an enormous increase in the Fed’s balance sheet asset, which pushed long-term yields down. With the 10-year U.S. Treasury at roughly 3.00%, mortgage rates at more than 5%, and the market pricing at a short-term rate of nearly 3% by year-end, normalization is happening fast. So what does that mean for investors? Here are some basics: Higher interest rates mean that profits now are more valuable than more-illusory profits in the future. And all that venture capital money sloshing about? That sound you hear is the collective shriek of start-up workers realizing that firm outings to Coachella may not be the best way to spend the cash because there might not be as much of it in the future. So what is back in style? As old school as it gets: Berkshire Hathaway bought $51 billion of stocks in the first quarter.
Volatility is likely making itself at home, but substantial employment, a growing economy, and a very engaged and accountable Fed may mean we stave off or control recession, along with inflation.
For the average investor: stay the course. Continue contributions as outlined by your financial professional, the market is close to being on sale. Hampton Park Financial Planning is tracking this information and other updated planning strategies on a daily basis and would gladly be a second set of eyes for you.
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