Commentary provided by Mark Szycher, Vice President, Investment Specialist, AIG Retirement Services
Market Performance Snapshot* (Week ending April 22, 2022 and Year-to-date)
- Dow Jones Industrial Average®: -1.9% | -7.0%
- S&P 500® Index: -2.8% | -10.4%
- NASDAQ Composite® Index: -3.8% | -17.9%
- Russell 2000® Index: -3.2% | -13.6%
- 10-year U.S. Treasury note yield: 2.90%
- Up 7 basis points from 2.83% on April 14, 2022
- Up 139 basis points from 1.51% on December 31, 2021
- Best-performing S&P 500 sector this week: Real Estate, +1.3%
- Weakest-performing S&P 500 sector this week: Communications Services, -7.7%
*Past performance is no guarantee of future results.
Equity markets fall as investors anticipate aggressive Fed actions
Stocks dropped sharply to end the week—the Dow Jones Industrial Average fell 981 points on Friday—and Treasury yields climbed higher as hawkish remarks by Fed chair Jay Powell and other officials weighed heavily on equities. Mixed earnings reports and trimmed future earnings guidance also pressured stocks.
- Netflix shares fell more than 35% after the company reported its first drop in subscribers since 2011, blaming factors including increased competition, password sharing, and the shutdown of its services in Russia. After losing 200,000 subscribers last quarter (bringing its subscribership to 221.6 million), the company expects to lose another 2 million in the current quarter and warned of “revenue growth headwinds.” Netflix was a big winner during the pandemic shutdowns, but its earnings statement noted that “Covid clouded the picture” by obscuring some of the company’s growth challenges.
- Procter & Gamble reported higher-than-expected revenue and earnings as price increases helped the consumer products giant mostly keep pace with rising supply chain costs. The company said consumers have so far been willing to accept higher prices, but “we don’t assume that what we’re seeing to date is necessarily an indication of what will happen in the future.” P&G raised its outlook for full-year sales and revenue growth but said costs and currency-exchange trends will likely cause earnings to come in at the lower end of guidance.
- Johnson & Johnson reported higher revenue that slightly missed expectations, while earnings topped estimates. The company downgraded its full-year 2022 sales and earnings forecasts as it faces supply shortages, currency-exchange issues, and rising labor, energy, and transport costs. J&J also said it would no longer report sales expectations for its COVID vaccine, citing a global surplus of doses and uncertain demand, but noted that sales were immaterial to results because the vaccine is sold at a not-for-profit price.
- IBM topped revenue and adjusted earnings estimates as the company continued to shift its focus toward cloud services and artificial intelligence.
- Tesla generated higher revenue and earnings than expected in the first quarter, including an 87% jump in automotive revenue. Like other automakers, Tesla has seen tight inventories due to supply chain challenges, which it expects to continue, recently having shuttered production in Shanghai due to government-imposed COVID lockdowns.
- United Airlines reported a larger loss and less revenue than expected, but the stock rose as the company forecast record sales in the current quarter and a return to profit this year as travel demand surges. American Airlines beat revenue and income expectations amid record March sales and forecast higher sales and a return to profit in coming quarters. Across the industry, higher fares are helping to offset higher fuel costs.
Treasury yields continue to climb as Fed officials speak of expeditious tightening
The 2-year and 10-year Treasury yields reached three-year highs amid continued expectations for aggressive Fed rate hiking; the 2-year yield rose above 2.77% and the 10-year above 2.96% before stepping back on Friday. The real 10-year yield (adjusted for inflation) climbed from -0.52% on March 31 to 0.00% on April 19. Very short term rates have also risen, with the 3-month T-bill climbing from 0.52% to 0.86% this month.
- At a conference sponsored by the International Monetary Fund, Fed chair Jay Powell said, “It is appropriate in my view to be moving a little more quickly” on interest rate increases than in past rate-hiking cycles, confirming that a 50 basis point increase in the federal funds rate “will be on the table for the May meeting.” He added, “We’re really going to be raising rates and getting expeditiously to levels that are more neutral and then that are actually tight ... if that turns out to be appropriate once we get there.”
- With respect to inflation, Powell suggested the Fed is less optimistic about inflation easing as global supply chains improve: “We’re also no longer going to count on help [with reducing inflation] from supply-side healing.”
- San Francisco Fed president Mary Daly said she expects “an expeditious march” upward in rates toward a neutral—neither accommodative nor restrictive—stance. She did acknowledge that rate rises could lead to a reduction in economic growth or even a shallow recession that wouldn’t “derail the long-run expansion.”
- Chicago Fed president Charles Evans said, “I’m open to doing 50 basis point increases in order to front-load this a little bit.” Cleveland Fed president Loretta Mester also voiced support for a 50 basis point increase in May “and maybe a few more” this year.
- Atlanta Fed president Raphael Bostic took a somewhat more dovish view in comments to CNBC. While saying “I think it is very important that we get to neutral, and we do that in an expeditious way,” he added the Fed “needs to be cautious as we move forward,” carefully watching the economic effects of interest rate hikes.
- The World Bank lowered its forecast for global growth in 2022 from 4.1% to 3.2%, expecting global debt crises to worsen, citing the conflict in Ukraine, inflation, and COVID-related shutdowns in China.
- The U.S. dollar continued to climb higher, with the Wall Street Journal Dollar Index (measuring the greenback against a basket of 16 other currencies) reaching its highest level since May 2020. Fed rate hikes, geopolitical instability, and confidence in the U.S. economy’s growth outlook vs. other economies has been attracting investors to dollars. While a stronger dollar can benefit American consumers, it also poses challenges for U.S. multinational companies and for developing economies that issue dollar-denominated debt.
- S&P’s U.S. services purchasing managers index (PMI) remained in expansion in April but unexpectedly dipped to 54.7 versus a forecast of 57.9 and March’s 58.0. Manufacturing PMI was 59.7, above the consensus estimate of 58.2 and March’s 58.8.
- U.S. housing starts unexpectedly rose in March, though growth was concentrated in apartments and condos as single-family housing starts declined. Housing permits, a gauge of future building, also rose for multi-family while declining for single-family.
- The National Association of Home Builders/Wells Fargo Housing Market Index dipped. The NAHB said, “Despite low existing inventory, builders report sales traffic and current sales conditions have declined to their lowest points since last summer as a sharp jump in mortgage rates and persistent supply chain disruptions continue to unsettle the housing market.”
- The National Association of Realtors reported existing home sales fell 2.7% in March from February, while the average home price reached $375,300, 15% higher than a year earlier and the highest in records dating to 1999. Demand for mortgages to purchase homes is down 14% from the same period a year ago and refinancing volume has plunged 68%, according to the Mortgage Bankers Association.
Final thoughts for investors
Corporate earnings reports to date have suggested consumers are resilient, helping companies fight higher costs with higher prices. But inflation could weigh on performance in the future, and the Fed’s efforts to combat inflation with higher interest rates will have impacts that not even Fed officials can fully foresee. With uncertainty high, keep long-term goals in focus and speak with a financial professional.
VC 30955 (04/2022) J860506 EE