Prevailing pessimism masks market resilience

 

Markets may have already priced in many of investors’ biggest concerns.

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, the headwinds 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.

Performance reflects price returns as of market close on April 29, 2022.

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, 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, 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.

Your financial advisor can help address questions about how current conditions may impact your holistic plan.

 

Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the Raymond James Chief Investment Office and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. An investment cannot be made in these indexes. The performance mentioned does not include fees and charges which would reduce an investor’s returns. Small cap securities generally involve greater risks. International investing is subject to additional risks such as currency fluctuations, different financial accounting standards by country, and possible political and economic risks. These risks may be greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.