Commentary provided by Mark Szycher, Vice President, Investment Specialist, AIG Retirement Services
Market Performance Snapshot* (Week ending April 15, 2022 and Year-to-date)
- Dow Jones Industrial Average®: -0.8% | -5.2%
- S&P 500® Index: -2.1% | -7.8%
- NASDAQ Composite® Index: -2.6% | -14.7%
- Russell 2000® Index: +0.5% | -10.7%
- 10-year U.S. Treasury note yield: 2.83%
- Up 12 basis points from 2.71% on April 8, 2022
- Up 132 basis points from 1.51% on December 31, 2021
- Best-performing S&P 500 sector this week: Materials, +0.7%
- Weakest-performing S&P 500 sector this week: Information Technology, -3.8%
*Past performance is no guarantee of future results.
Equities dip amid hot inflation data and first round of Q1 earnings reports
Equities ended a holiday-shortened week mostly in the red as investors sorted through inflation data and the first batch of earnings reports from 2022’s first quarter. Only the small-cap Russell 2000 Index gained ground.
- March’s Consumer Price Index (CPI) registered an 8.5% rise over the past 12 months, slightly higher than expected and above February’s 7.9%—in fact the highest level since December 1981. On a monthly basis, CPI rose 1.2%, faster than February’s 0.8%.
- Energy and food costs drove the surge. Gasoline prices rose 18.3% in March alone and 48.0% on the year, while food prices rose 1.0% in March and 8.8% over the past 12 months. Shelter costs rose 0.5% in March and 5.0% on the year. Used vehicle prices, a major contributor to inflation last year, declined 3.8% in March, but are still up 35.3% annually.
- Core CPI, stripping out energy and food costs, unexpectedly decelerated to a 0.3% gain in March from 0.5% in February while climbing 6.5% over the past 12 months, just above February’s 6.4% rise and the fastest pace since August 1982.
- The lower-than-expected core inflation reading and the decline in used vehicle prices gave some investors hope that inflation may be nearing a peak, particularly since the economy is entering a period during which price rises will be calculated from last year’s elevated figures. Those hopes sent Treasury yields down after the CPI report was released—the 10-year yield dipped to 2.68% after climbing past 2.8% leading into the report. The 2-year yield fell from above 2.5% to under 2.4%. However, hawkish comments from Fed officials sent yields back up later in the week.
- March’s Producer Price Index (PPI), which tracks prices charged along the supply chain before reaching consumers, rose 1.4% on the month (higher than February’s 0.9%) and 11.2% year-over-year, the highest annual gain in records dating back to 2010. Energy was the biggest contributor.
- Consumers continued to spend through inflation in March, though much of the growth was driven by energy and other necessities. The Census Bureau reported U.S. retail sales rose 0.5% for the month, lower than February’s upwardly revised 0.8% gain. Sales rose 6.9% from March 2021.
- Diving deeper, spending at gas stations rose 8.9% on the month (37.0% year-over-year); excluding gasoline sales, total retail sales declined 0.3% in March. Sales of motor vehicles and parts declined as higher prices and inventory issues took their toll. Excluding the positive contribution of gasoline sales and the negative contribution of vehicle sales, retail spending on all other categories rose 0.2%. Real (inflation-adjusted) retail sales were negative on both a monthly and annual basis.
- Shanghai’s lockdown continued to affect the operations of many international companies, including automakers, manufacturers, and technology firms, and growing COVID restrictions took hold in Guangzhou, a manufacturing hub. The U.S. State Department ordered non-essential personnel to leave and warned Americans about traveling in the area.
Fed officials open to larger rate hikes as global central banks raise rates
In addition to the CPI and PPI figures, a New York Fed survey of the public’s future inflation expectations jumped to a new high, with respondents expecting 6.6% inflation between now and March 2023. Last month’s reading was 6.0%. Longer-term inflation expectations remained more anchored, with respondents expecting inflation in three years to measure 3.7% vs. 3.8% in February’s survey. While anecdotal, the survey is viewed as useful by Fed officials who believe the public’s inflation expectations influence the actual level of inflation.
- Fed governor (and vice chair designee) Lael Brainard affirmed in remarks that “inflation is too high, and getting inflation down is going to be our most important task.” Brainard called potential signs of moderation in the latest CPI report, “very welcome,” adding, “I wouldn’t take a lot of signal from any one month of data, but I will be watching carefully for a continuation of this pattern.”
- Fed governor Christopher Waller threw his support behind multiple 50 basis point (0.5%) rate hikes: “I prefer a front-loading approach, so a 50 basis point hike in May would be consistent with that, and possibly more in June and July.” New York Fed president John Williams called a 50 basis point hike “a very reasonable option,” and Chicago Fed president Charles Evans said a 50 basis point hike “is obviously worthy of consideration, perhaps it’s highly likely.”
- The central banks of Canada and New Zealand raised their benchmark interest rates by 50 basis points. The European Central Bank, which has remained more accommodative than other central banks, held rates steady and said it will end its asset purchase program in the third quarter.
Banks and an airline kick off earnings season
Major banks entered earnings season facing lowered expectations for Q1 revenue and profit amid declining mergers and IPO activity and increased global market turbulence. By and large, results reported so far have exceeded analysts’ tempered expectations, with trading revenue boosting results.
- JPMorgan Chase saw a 42% drop in profit from the prior year but still topped revenue and adjusted earnings estimates. The bank added to its loan-loss reserves, reversing recent trends, with CEO Jamie Dimon saying, “We remain optimistic on the economy, at least for the short term—consumer and business balance sheets as well as consumer spending remain at healthy levels—but see significant geopolitical and economic challenges ahead due to high inflation, supply chain issues, and the war in Ukraine.”
- Goldman Sachs also saw its profit decline 42% yet topped earnings and revenue estimates, including a strong beat on trading revenue. A similar story emerged at Citi, whose profit dropped 46% while beating estimates thanks to strong trading revenue. Citi, which has a large global presence, increased its reserves for potential loan losses stemming from the Ukraine conflict. Morgan Stanley also registered lower profits while beating estimates.
- Wells Fargo beat on earnings but fell short of revenue expectations as mortgage-related revenue slipped during a quarter in which the average 30-year mortgage rate climbed to nearly 5%. However, Wells reported higher overall loan volumes and net interest income in the quarter.
- Delta Air Lines posted higher revenue and a shallower net loss than analysts expected as well as its best March bookings on record. The company said quarterly sales were 11% below 2019’s pre-pandemic level. Fuel and labor costs rose and Delta expects them to continue rising in the current quarter, but also expects sales to reach as high as 97% of 2019 levels as travel demand takes off. March’s CPI report showed airline fares rising 10.7% in March and 23.6% year-over-year.
Final thoughts for investors
Inflation remains a key market driver, with investors combing data to determine when price increases might start to ebb. The conflict in Ukraine and its impact on global energy and food supplies adds significant uncertainty to the inflation picture. Continued volatility is likely. Speak with a financial professional about staying on track toward your long-term goals.
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