April Market Review

April was the cruelest month of the year thus far with all major global financial assets performing poorly with the exception of the U.S. dollar. Monetary policy, inflation, supply chain disruptions, Chinese zero tolerance Covid policy, and the war in Ukraine combined to push rates and commodities sharply higher and global equities lower. After posting one of the only positive numbers in March, U.S. equity markets lost 8.7% in April, one of the worst returning equity markets globally with technology stocks leading the way down as evidenced by the NASDAQ marking its worst monthly decline since the global financial crisis in 2008. Chinese equity markets (-4.1%) saw a late month rally with expectations of easing both monetary policy and technology regulation while Europe was a top relative performer losing only 0.75% in local currency terms but -5.75% after adjusting for the strong U.S. dollar. Fixed income markets posted a fifth consecutive month of losses with both U.S. bonds (-3.75%) and non-U.S. bonds (-6.99%) losing substantial ground. Interest rates crept higher on monetary policy (Fed among others) and inflation concerns with inflation data sticking at multi-decade highs. High yield credit spreads moved methodically higher through the month, from 3.43% to 3.97% but remain relatively low in a longer-term context. Commodity markets enjoyed another strong month of gains mostly through the energy and agricultural complexes while industrial and precious metals both lost ground in April. The Russia-Ukraine war has sent energy and agricultural prices soaring this year with oil (+44%) and natural gas (+103%) as well as corn, wheat, soybeans up 27%-38%. The labor market, economic activity, and corporate earnings all look relatively encouraging with elevated inflation and its uncertain path forward posing questions to any bullish thesis. Unemployment of 3.6%, service and manufacturing surveys solidly in expansionary territory, and U.S. earnings growth of approximately 9% all suggest relatively healthy underlying fundamentals.

Market Anecdotes

• FactSet noted that, through April, 55% of S&P 500 companies have reported earnings with beats and margins of 80% and 3.4% respectively. Blended earnings growth is at 7.1%. Revenue beats and margins of 72% and 2.2% alongside revenue growth of 12.2% remain relatively encouraging.
• The yield on the 10-year Treasury note posted its biggest monthly gain in 13 years. Global bonds have lost 11.30% in the first four months of the year and 5.48% just in April resulting in the worst monthly and YTD return in history. Bloomberg’s U.S. Aggregate Index posted worse monthly returns on only two occasions, October 1979 and February 1980 during the last bout of runaway inflation in the U.S.
• Stocks are also off to their worst start on record. The S&P 500 is down 12.9% so far this year, marking the index’s worst YTD return in almost 95 years of history.
• The Nasdaq dropped 13.2% just in the month of April; its worst showing since October 2008. The index is down 21% in 2022; its worst start to a year on record. The FANMAG complex lost over $1 trillion in market cap just in April.
• Commodities continued to power higher in April. The Bloomberg Commodities Index returned 30.75% in the first four months of the year, far outpacing the returns at a similar point of any other year on record.
• For the month, WTI rallied 4.4% and finished the month at $104.7 per barrel. Factors include lack of Russian supply to the West, Saudis holding back supply, and US ramp up. April’s rally marks a five-month streak of higher prices which is second on record only to the eight-month rally of late 2010/early 2011.
• The French election victory of Emmanuel Macron over Marine Le Pen gave markets a dose of familiarity and certainty with respect to France’s role within the EU and globally.
• Fed comments have firmed up market expectations of the pace and scale of rate hikes with 325bps currently priced in over the next twelve months. In response, the Bloomberg Aggregate bond index (YTD) has experienced its worst return in history.
• April data releases from China reveal a mixed bag of moderate growth countered by CoVid-19 related drag on economic activity at a time with depressed private sector demand and weak housing market. Shipping congestion in Chinese ports is also clearly on the rise.
• A weak Yen in 2022 hasn’t translated to strong performance by Japanese exporters as evidenced by Japan’s equity market being down double-digits. Several forces factoring in with a rebound/reversion opportunity seemingly still in wait.

Weekly Market Report: May 6, 2022

Market impactful events last week included monetary policy announcements by the Fed and several other central banks, ample inflation speculation, and continued Russia-Ukraine fallout (NATO enlargement, Russian-EU economic warfare). Altogether, the week translated to significant volatility across equity, interest rates, and commodity markets with notable moves higher in interest rates (+0.25%) and oil (+4.9%) but a relatively muted move in U.S. equities (-0.55%) contrasted with softer non-U.S. equity markets (-1.75%). The yield curve steepened significantly reflecting a marginally dovish FOMC and commensurately higher projected forward economic growth but growing anxiety over Russia-Ukraine conflict ramped the uncertainty factor.

Market Anecdotes

• Quite a bizarre week in the equity market with neck breaking up and down moves netting to a pretty flat S&P 500 by the end of the week. Keeping investor emotions in check in times like these is easier said than done but strongly advisable.
• The 10yr UST bond traded above the psychological 3% level for the first time since a couple of brief windows in 2018, clearly exerting pressure on equity market multiples and translating to some record downside across fixed income markets.
• A big yield curve steepener on both 3m/10y 204 to 227) and 2y/10y (19 to 40) reflects a sharp upgrade to the growth outlook and higher inflation expectations accordingly.
• High yield spreads have started to expand with the OAS breaching 4% last week but remain relatively modest when viewed over a longer-term context.
• Real yields, as measured by the 10yr TIPS yield, moved sharply higher over the past week including a two day move of +30bps, taking the 38 day average up by nearly 125bps.
• Bianco Research made note that positive correlations between stock and bond prices translated to the second worst year (-9.6% thus far) on record for a 60/40 portfolio since 1988.
• Last week’s FOMC meeting produced the expected 50bps rate hike and the unveiling of a relatively rapid balance sheet unwind (QT). Powell also set expectations for two additional 50bps hikes in the next two meetings, after which they expect to see some moderation in inflation.
• Other central bank policy moves last week saw the Reserve Bank of Australia hike by 25bps, Reserve Bank of India hike 40bps, and the BoE hike by 25bps.
• U.S. earnings growth of 9.1% and sales growth of 13.3% alongside European growth of 11% and 9% respectively are outpacing consensus estimates, especially so in Europe.
• Financial system liquidity is a key barometer. Bespoke made note of a U.S. Treasury April-June borrowing report with a forecast of paying down net $26b versus prior a forecast of a net $66b borrow – the first time in six years the Treasury
announced an expected drop in debt stock.
• The ten-minute OPEC meeting last week resulted in a modest 432,000 bpd increase in oil production. Russian sanctions, a planned EU embargo on Russian oil, falling Chinese demand, and Russian threats of cutting off natural gas supplies to Europe are roiling energy markets.
• Black Knight’s March Mortgage Monitor report saw the delinquency rate drop to a new record low 2.4%, well below the prior 3.22% low mark set in January of 2020.

Weekly Market Report: April 29, 2022

Risk markets last week sensed potential escalation paths in Ukraine alongside a persistently hawkish tone from the Fed and some mixed earnings reports, resulting in a sharp turn lower in equity markets, no significant moves in interest rates, and a safe-haven surge in the USD. The S&P 500 endured a fourth consecutive down week, ending down nearly 9% in April but developed and emerging market international stocks held up a bit better. Commodities and interest rates didn’t move much on the week with next week’s FOMC meeting on deck while the USD surged to nearly a twenty-year high.

Market Anecdotes

• Equity markets limped to end the week (-3.3%) and month (-8.7%) including a sharp move lower to end trading on Friday afternoon. Bespoke noted some observations regarding VIX (not peaking), semis (downtrend with support), breadth (improving), and the value/growth cycle.

• The rout in technology stocks continued last week, bringing the NASDAQ to a 13% loss in April, now down 21% YTD, its worst four month start to a year since the GFC.

• A weak GDP number countered by continued inflationary pressures seems unlikely to take the Fed off its path from ‘easy/emergency’ to ‘neutral’ policy but a pivot to ‘tight’ still seems off on the horizon.

• The Fed is widely expected to increase the Fed Funds rate by 50bps this week and announce details of their balance sheet reduction plan.

• The USD rallied 0.5% on five consecutive days through Thursday, tying 1978 and 1985 for the longest streak of that magnitude of a gain. It is now up 8% YTD and at levels not seen since 2003.

• Anxiety provoking rhetoric and conflict surrounding the Russian invasion of Ukraine including Russian accusations of a NATO proxy war and potential European energy embargos on Russian oil have fueled equity market volatility.

• FactSet noted that 55% of S&P 500 companies have reported earnings with beat rates and margins of 80% and 3.4% respectively. Blended earnings growth is at 7.1%. Revenue beat rates and margins of 72% and 2.2% alongside revenue growth of 12.2% remain relatively encouraging.

• The U.S. Senate confirmed Lael Brainard as Vice Chair of the Federal Reserve last week, 52-43.

• French President Macron defeated Marine Le Pen garnering 59% of the vote last week in what was half of his margin of victory in the prior contest back in 2017.

• An array of conditions has fed into an aggressive selloff in the RMB recently including deteriorating economic conditions, a narrowing trade surplus, and easing monetary policy.

• Blaine Rollins wrote that the semiconductor shortage has reached a level where an industrial company is buying washing machines to strip out the semiconductors to use in their modules.

Weekly Market Report: April 22, 2022

Market drivers last week included a more hawkish tone coming from central bankers, the first big slate of Q1 corporate earnings reports, and continued concerns surrounding inflation and supply chain issues due to CoVid protocols in China and the war in Ukraine. Global equity markets fell over 2% taking the S&P 500 back into double digit loss territory on the year. Interest rates pushed higher, particularly on the short end, on inflation data and hawkish central bank comments while commodity markets traded down on a 4.5% drop in oil prices.

Market Anecdotes

• Comments from the Fed and the ECB both leaned into more of a hawkish tone last week with Powell signaling comfort with 50bps in May and Joachim Nagel noting the possibility that QE may be concluded in the current quarter.

• The US 10-year inflation break-even climbed to over 3% on Friday, the highest level in at least two decades.

• Fed comments have firmed up market expectations of the pace and scale of rate hikes over the past two weeks with 325bps currently priced in over the next twelve months. In response, the Bloomberg Aggregate bond index (YTD) has experienced its worst return in history.

• Q1 earnings season thus far has S&P 500 blended earnings growth at 6.6% and beat rates and margins of 79% and 8.1%. Revenue growth of 11.1% would mark the fifth straight 10%+ quarter.

• Technology and shadow technology stocks (FAANGs) are clearly facing some headwinds with the easing of Covid restrictions and rising interest rates. Facebook and Netflix have fallen the hardest, but Google and Amazon are meaningfully underperforming as well.

• The French election victory of Emmanuel Macron over Marine Le Pen gave markets a dose of familiarity and certainty with respect to France’s role within the EU and globally.

• Data releases from China last week reveal a mixed bag of moderate growth countered by CoVid-19 related drag on economic activity at a time with depressed private sector demand and weak housing market. Shipping congestion in Chinese ports is also clearly on the rise.

• The complexion of the REIT industry has changed notably over the past ten years with cell towers, data centers, industrial, and self-storage gaining at the expense of retail, office, hotels, and health care.

• A weak Yen in 2022 hasn’t translated to strong performance by Japanese exporters as evidenced by Japan’s equity market being down approximately 14%. Several forces factoring in with a rebound/reversion opportunity seemingly still in wait.

• Gold is finding itself in an interesting tug of war between inflation and global uncertainty on one end and a strong dollar and rising real rates on the other.

Weekly Market Report: April 15, 2022

The holiday-shortened week ushered in the beginning of first quarter earnings season alongside a relatively full economic calendar. Uncertainty surrounding monetary policy and the war in Eastern Europe continued as the primary undercurrents in the market. Global equity markets were mixed, but generally down for the week, while rising bond yields added to an already poor year-to-date outcome for fixed income investors. Oil and broad commodity markets enjoyed another strong bid last week pushing most commodities handily into double-digit returns for the year while the USD benefitted from the risk-off tone, notching a 0.50% gain for the week.

Market Anecdotes

• Prevailing uncertainties have translated to some notable equity market churn with the S&P 500 crossing below the 200 DMA six times and back above five times.
• After bouncing over 16% in the last two weeks of March, the NASDAQ has pulled back over 8% in what has been the
worst first half of April since the tech bubble crash in early 2000.
• Defensive sectors of utilities and consumer staples are now at all time high valuations, currently in the 99th percentile over the last 10 years.
• Sitting here on the doorstep of Q1 earnings season, it’s worth noting the Golub Capital Altman Index (private middle
market companies) experienced YoY earnings growth of 9% and revenue growth of 18% during the first two months of
2022.
• As the bond market suffers through one of its worst periods ever, we must ask if we are transitioning from TINA (there is no alternative) to BABY (bonds are better yielders)?
• A BofA fund manager survey shows 43% of fund managers believe inflation is transitory and 49% feel it is ‘permanent’. They also reported an average expectation of seven impending interest rate hikes.
• Fedspeak has been fairly consistent with one of the more hawkish FOMC members, Waller, noting last week that we are nearing peak-inflation readings. Markets still expect approximately +130bps over the next three meetings and twelve to thirteen over the full cycle.
• A poll by The Harrris reveals some of the real-world impacts higher inflation has on consumer spending patterns with
dining/impulse buys as the first cuts and travel/cocktails less elastic.
• Kastle published an interesting chart looking at return-to-normal activities including travel, dining, movies, but clearly not the office – casting further clouds on the office sector.
• Calls that the sky is falling due to mortgage rates hitting 5% last week were in abundance but a look at historical
mortgage rates from Bespoke provides some well-placed perspective.
• The sky is falling mentality clearly extended to AAII sentiment survey figures last week with bullish sentiment of 15.8% reaching its lowest level since 1992
• Defense spending by NATO countries shows the U.S. accounting for 69% of the total defense spend with material
spending increases across the NATO bloc. This is somewhat intuitive when adjusted for the distribution of the global
wealth, which is concentrated in the U.S.