Well, folks, it’s tough out there in the markets. How tough? From January through April, it’s the worst four-month start to a year since 1939. The S&P 500 is down 16% so far in 2022 and down 9% in just the last month. The NASDAQ, home to most technology stocks, is down nearly 25% since Jan. 1. Many tech stocks are 50% or more off their highs of 2021. While in recent years there has not much happening with bonds as yields bumped along the bottom, this year they are getting pummeled as the Federal Reserve ratchets up interest rates to fight inflation, which is cresting a 40-year high. Core U.S. bond funds are down 10% this year. In short, it’s been a very challenging year so far in the markets, and in our world in general.
Investors are focused on three main worries: the Fed’s fight against inflation, the war in Ukraine and continuing supply chain bottlenecks.
The Fed’s Hand
By far the biggest concern for investors is the Fed’s rate hiking. While almost everyone agrees that interest rates are too low and that inflation is too high, investors do not appear to be confident that the Fed will be able to raise rates high enough to slow growth and tame inflation while also not tipping the economy into recession. As inflation rages and the Fed talks tougher, investors seem to be starting to bet against the “soft landing” scenario. Today the Bureau of Labor Statistics (BLS) released the April Consumer Price Index (CPI) reading. The April reading of 8.3% was slightly lower than March’s 8.5%, but still slightly higher than economists expected. Inflation could be nearing a peak, but this CPI number was at best noncommittal. The unfortunate reality is that the Fed lacks the precision tools to directly address most sources of inflation. The Fed can target domestic wage inflation by slowing the economy, but it cannot control the price of oil or the price of food, which are global commodities. It also cannot do much to help solve global supply chain problems.
Companies Tempering Their Outlooks
With companies now reporting their first quarter earnings, most are striking a cautious tone about their business prospects for the balance of 2022. Given what our world looked like on January 1st versus today, there is just no way that businesses will not be feeling pressure from rising wages, higher commodity prices and geopolitical tensions. Most managements are taking the opportunity to talk down their growth trajectories for 2022, and investors are generally not taking the news well. With stocks still generally carrying optimistic price-to-earnings multiples, any companies lowering their outlooks for the year are seeing their stocks punished.
What Might Help
We expect rocky bond and stock markets to persist for some time. Potential catalysts that could help things to stabilize include a peaceful settlement of the war in Ukraine, an improvement in supply chain bottlenecks or, most importantly, signs that the Fed is getting the upper hand on inflation. But right now, these catalysts seem to be a way off. On the bright side, the labor market is very tight, with unemployment at only 3.6%. According to last week’s Job Opening and Labor Turnover (JOLTS) report, job openings are at a record high 11.5 million, and there are two job openings for every worker seeking employment. But while there is plenty of work to be found, consumers are also increasingly concerned by rising prices, which are everywhere.
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