Keeping focused on your long-term goals

Weekly Market Commentary | Week ending May 6, 2022

 

Commentary provided by Mark Szycher, Vice President, Investment Specialist, AIG Retirement Services

Market Performance Snapshot* (Week ending May 6, 2022 and Year-to-date)

  • Dow Jones Industrial Average®: -0.2% | -9.5%
  • S&P 500® Index: -0.2% | -13.5%
  • NASDAQ Composite® Index: -1.5% | -22.4%
  • Russell 2000® Index: -1.3% | -18.1%
  • 10-year U.S. Treasury note yield: 3.14%
    • Up 21 basis points from 2.93% on April 29, 2022
    • Up 163 basis points from 1.51% on December 31, 2021
  • Best-performing S&P 500 sector this week: Energy, +10.2%
  • Weakest-performing S&P 500 sector this week: Real Estate, -3.8%

 *Past performance is no guarantee of future results.

Equities and Treasuries endure a volatile week

Stocks were whipsawed through the latter half of the week, rallying sharply on Wednesday following the Federal Reserve’s interest rate announcement but giving back all that ground and more on Thursday. By the time the dust settled Friday, the broad-based S&P 500 finished down slightly for the week while the tech-heavy NASDAQ Composite took a bigger hit. Treasury yields also fluctuated broadly.

  • As expected, the Federal Open Market Committee (FOMC) voted unanimously to raise the benchmark federal funds rate by 50 basis points to a target range of 75 to 100 basis points (0.75%-1.00%). It was the first time since 2000 that the Fed hiked 50 basis points at a single meeting.
  • The Fed also announced plans to reduce its asset holdings by allowing up to $30 billion/month of Treasury securities and $17.5 billion/month of mortgage-backed securities (MBS) to mature in June, July, and August without reinvesting the proceeds, followed by up to $60 billion/month in Treasuries and $35 billion/month in MBS starting in September.
  • Major indices jumped and Treasury yields dipped after Fed chair Jay Powell said in his post-meeting press conference on Wednesday that the FOMC isn’t “actively considering” a 75 basis point rate increase, but will instead consider additional 50 basis point increases at each of its next two meetings in June and July: “Assuming that economic and financial conditions evolve in line with expectations, there is a broad sense on the committee that additional 50 basis point increases should be on the table at the next couple of meetings.”
  • The tide turned on Thursday, however, as markets revisited concerns over inflation, supply chains, Ukraine, China, and the reality that even without a 75 basis point hike the Fed is still on a path to substantially tighten monetary policy and reduce market liquidity this year and next. The 10-year Treasury yield, which had climbed to 3% prior to the Fed’s announcement and fallen to 2.91% immediately thereafter, jumped to 3.10% on Thursday and closed Friday at 3.14%.
  • In his press conference, Powell reiterated his optimistic view of the economy, noting that although real (that is, inflation-adjusted) GDP was negative in the first quarter, “underlying momentum remains strong … Indeed, household spending and business fixed investment continue to expand briskly. The labor market has continued to strengthen and is extremely tight.” He later added that nothing suggests the economy is “close to or vulnerable to a recession.”
  •  As a result of these strengths, Powell said the economy is “well-positioned to handle tighter monetary policy” without dipping into recession: “We have a good chance to have a soft or softish landing.”
  • Despite the optimism, Powell also noted the inherent challenges the Fed faces in taming inflation: “We don’t have precision surgical tools. We have essentially interest rates, the balance sheet, and forward guidance. And they’re famously blunt tools. They’re not capable of surgical precision.”
  • Furthermore, while the situations in Ukraine and China are likely to continue complicating supply chains and putting upward pressure on inflation, the Fed’s “tools don’t really work on supply shocks. Our tools work on demand ... We can’t affect really oil prices or other commodity prices or food prices, and things like that.” Powell noted several times that the task of returning to price stability will be challenging.
  • The effects of Fed rate increases are already percolating through the economy, Powell said, as markets have responded to the Fed’s signaling since late 2021: “Monetary policy is working through expectations now to a very large extent. We’ve only done two rate increases, but if you look at financial conditions, the [2-year Treasury yield] is at 280 [basis points] now. In September, I think it was at 20 basis points. And that’s all through the economy. People are feeling those higher rates already.”
  • Foreign central banks also raised rates. The Bank of England hiked for the fourth straight meeting, bringing its benchmark rate to 1% and forecasting inflation reaching 10%. The Reserve Bank of Australia raised its benchmark rate for the first time since 2010 and signaled further increases ahead.
  • The European Commission proposed a new set of sanctions that would require most EU member countries to end purchases of Russian oil products by the end of the year. Nonetheless, natural gas purchases would continue. Benchmark oil prices rose about 5% for the week. Russian banks would also face further sanctions.

Economic data underscore labor market strength

According to the Bureau of Labor Statistics, the U.S. economy created 428,000 jobs in April, higher than the 400,000 expected and equal to March’s revised figure. The unemployment rate also remained unchanged at 3.6%, near its pre-pandemic level. The labor force participation rate ticked down to 62.2% from 62.4% in March and is 1.2% below the pre-pandemic level, contributing to the continuing shortage of available workers.

  • The largest job gains in April occurred in leisure and hospitality, manufacturing, and transportation and warehousing. Employment in leisure and hospitality is still about 8.5% below pre-pandemic levels, though this sector has a large number of unfilled openings.
  • Average hourly earnings rose 0.3% in April—slower than March’s growth—and 5.5% over the past 12 months, relatively robust but below the rate of inflation.
  • The Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) revealed a record number of job openings and job quits in March as the labor market remained exceptionally tight. Job openings rose to more than 11.5 million from 11.3 million in March and job quits surpassed 4.5 million from just under 4.4 million in February. The retail sector saw the largest increase in openings, while leisure and hospitality and health care also had large numbers of openings.
  • Evidence suggests small businesses may be having a tougher time navigating the tight labor market. JOLTS found job openings declined among the smallest companies—those with fewer than 50 employees—while ADP’s widely watched hiring survey found that even as overall hiring increased in April, small businesses shed jobs, which ADP attributed to stiffer competition for workers amid labor supply shortages.
  • New orders of manufactured goods increased 2.2% in March, more than the 1.1% expected, according to the U.S. Census Bureau. Orders have increased 22 of the past 23 months. However the Institute for Supply Management’s purchasing managers index for manufacturers dipped to 55.4 in April—still indicating expansion, but the lowest figure since September 2020. Manufacturers reported higher numbers of workers quitting and increasing concern over China lockdowns.

Corporate earnings show evidence of economic strength, while COVID effects linger

With COVID vaccines accounting for more than half of sales, Pfizer’s first quarter revenue and income surged, allowing the pharmaceutical maker to easily top earnings estimates. The company expects continued strong sales of COVID vaccines and treatments, but it also lowered full-year earnings guidance on account of R&D costs and currency exchange issues related to the dollar’s recent strengthening. Moderna also topped earnings expectations as sales of its vaccine more than tripled from the same quarter last year.

  • CVS Health topped estimates as demand for COVID home tests and vaccines remained strong in the first quarter. The company expects demand in those areas to decelerate in 2022. CVS also expects inflation to push some consumers to its store brands.
  • Starbucks beat revenue and matched net income estimates as U.S. sales increased 12% from the prior year. However COVID closures in China weighed on results and the company suspended forward guidance until global economic conditions become clearer.
  • Chipmaker AMD saw strong quarterly sales growth, easily beating earnings estimates and posting current-quarter sales guidance that also topped estimates.
  • After rising at the start of the week, shares of several online retailers, including Etsy, Wayfair, and eBay, as well as ecommerce platform Shopify, fell sharply after disappointing earnings and/or sales forecasts suggested the sector is struggling to maintain the online shopping momentum that surged during the pandemic. The e-retailers’ woes added downward pressure to technology stocks.

Final thoughts for investors

The global economy continues to adapt to a host of challenging conditions and as Jay Powell noted in his press conference, “the economy often evolves in unexpected ways. Inflation has obviously surprised to the upside over the past year, and further surprises could be in store.” In an uncertain and often volatile environment, speak with a financial professional about staying focused on your long-term goals.

VC 30955 (05/2022) J870904 EE

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