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.

Weekly Market Report: April 8, 2022

Inflation, monetary policy, and the Russia-Ukraine war continued to drive headlines last week pressing, interest rates sharply higher and U.S. equity markets lower, breaking a streak of three consecutive positive weeks in the stock market. FOMC meeting minutes and related comments from Fed policy makers sent bond yields up to levels not seen since March 2019, pressuring higher valuation segments of the equity market (technology, consumer discretionary) while defensive areas (healthcare, utilities, staples) posted nice gains. Commodity markets were mixed with energy markets trading sideways but grains rallying on continued turbulence in Ukraine.

Market Anecdotes

  Fed minutes from the March meeting released last week illustrated a clear FOMC appetite for a faster pace of rate hikes, pressuring rates, and risk assets accordingly. Minutes also conveyed a faster pace of QT with a three-month ramp leading to a pace of $95b per month of roll-off.
• Comments from Brainard and Bullard effectively “strangled the dove” pushing long-term bond yields higher and un-inverting the yield curve accordingly. Aside from rate policy, balance sheet policy is being priced into markets with impact estimates as high as 350bps in 2022.
• CME futures is pricing in an 81% probability of a 50bps hike on the upcoming May 4th meeting and 53.5% of another 50bps on the June 15th meeting. Overall, markets are pricing approximately 266bps of Fed hikes over the next twelve months.
• The UN index of global food costs rose 13% in March to set a new record high, raising concerns surrounding both humanitarian and social/political implications.
• Bianco Research noted this is the first time the S&P 500 carried a negative 3mo return into a rate hike cycle and the fastest 2y/10y inversion post initial hike as well. Clearly, the unique nature of war and a global pandemic (supply chains) factor largely into these observations.
• U.S. Treasury par real yield curve rates (5yr, 10yr, 30yr) have increased from (-1.58, -0.97. -0.36) to (-0.58, -0.22, 0.15) reflecting tighter Fed policy and increasing TIPS break evens.
• A U.S. Treasury exemption allowing Russian debt payments through American banks through May 25th was also pulled back due to the reported violence in Ukraine.
• Early in the week Russian atrocities in Ukraine surfaced renewed calls for EU-imposed restrictions on oil imports from Russia and more aggressive exploration of weaning the EU off Russian natural gas.
• Economic fallout and social tensions from China’s COVID lockdowns are increasing with speculation on policy responses gaining attention commensurately.
• FactSet made the interesting observation that Wall Street analysts have more ‘Buy’ ratings on stocks, as a percentage of overall ratings, than any time since 2010.

March Market Review

While the bounce in the back half of March felt like a recovery, the upside move was limited to U.S. equities and commodities while fixed income markets posted a fourth consecutive month of losses and international markets struggled through a backdrop of the war in Ukraine. Volatility across equity and interest rate markets remained elevated with the war and the removal of monetary policy accommodation the key drivers.

U.S. equities (+3.48%) led the way in March with global ex-U.S. (+1.16) markets posting more modest returns driven by commodity oriented geographies of Brazil, Norway, Denmark, Australia, and Canada. COVID-19 lockdowns across China took mainland Chinese stocks down 8% and overall emerging markets down 2.3% while economic risks stemming from the war in Ukraine pressured European equities to a 1.7% decline. The same war that pressured European equities resulted in Russian equities being excluded from all standard indexes, effectively disappearing from the global equity market landscape. Large cap stocks outperformed small caps and from a style/sector standpoint, value outperformed growth led by energy, materials, and utilities.

Commodity markets benefited from supply disruption stemming from the Russia-Ukraine war and a safe haven/inflation bid for gold. WTI oil (+4.76%) closed above $100 while natural gas surged 28%. Commodity gains were broad based during the month with grains, industrial metals, and precious metals participating in the rally.

From an economics and earnings perspective, the landscape looks relatively encouraging with the glaring exception of the prevailing global inflationary conditions. The labor market is very tight with unemployment nearly back to pre-pandemic record low levels. Both the services and manufacturing sectors are solidly in expansionary territory with robust levels of activity while restrictive Covid health policy measures have largely disappeared with China’s zero tolerance policy the only material global outlier. As we move into the first quarter earnings season, the S&P 500 is estimated to post 4.5% profit growth with a good possibility of hitting a fifth consecutive quarter of over 10% once earnings beat rates and margins begin to take shape.

Market Anecdotes

• In what Bespoke coined the ‘immaculate correction’ we’ve seen earnings estimates rising with stock prices (and multiples) falling, reflecting a relatively constructive forward runway translating to P/E multiple compression given the
Fed tightening cycle and prevailing geopolitical risks.
• Across twelve separate Fed speaking engagements, officials made clear the need for rates to reach neutral and move
into restrictive territory, while maintaining flexibility along the way.
• A key decision point for the economy and stock market will be what level is the true ‘neutral rate’ of interest. Is it the
FOMC’s terminal rate of 2.4% or is it closer to 3-4%? Stock markets would appreciate the Fed halting hikes below the
neutral rate in the short term, policy would eventually have to counteract remaining too stimulative in the long-term
• Strategas increased the percentage likelihood of recession to 35% due to the economic impacts of Fed tightening, higher rates, inflation, supply chain disruptions, and commodity price shocks. Meanwhile, yield curve slopes and economic data continue to paint a constructive picture.
• European policy makers will attempt to offset the impact of the Ukraine crisis through looser fiscal spending and U.S.
lawmakers have reopened the door to negotiations on the reconciliation package in a slimmed down version of the
initial $3.5t proposal but several roadblocks remain.
• The BCA geopolitical team is assigning a high likelihood that China will help Russia manage U.S. sanctions leading to U.S. sanctions on China later this year.
• Sector leadership across the U.S. markets so far in 2022 is basically energy then everything else, a mirror image and
clear departure from the technology led market over the past three years.
• U.S. equity markets falling and rising over 10% in a quarter is both very rare and perhaps (historically?) a positive setup to the coming months.

Weekly Market Report: April 4, 2022

Last week put a wrap on the month of March and the first quarter of 2022 with oil markets, inflation, and the yield curve driving the narrative. The first three months of the year delivered quite the rollercoaster ride with double digit equity market swings in both directions while March was a solidly positive month for stocks, commodities, and the USD. The same cannot be said for bond markets which ended the month with a bear flattener, an inverted 2y-10 yr slope, and higher rates in five of the last seven quarters.

Market Anecdotes

• U.S. equity markets were flat for the week but delivered strong returns in March with value (+3.5%) outperforming
growth (+2.4%) and large caps outperforming smaller caps. Energy and utilities were the standout performers while
financials and telecom lagged.
• Sector leadership across the U.S. markets so far in 2022 is basically energy then everything else, a mirror image and
clear departure from the technology led market over the past three years.
• U.S. equity markets falling and rising over 10% in a quarter is both very rare and perhaps (historically?) a positive setup to the coming months.
• While the stock market bounced sharply higher over the last two weeks of March, the bond market did not. Bianco
Research noted March was the eighth consecutive month of losses for The Global Aggregate Index.
• The 2yr/10yr slope inverted last week, triggering much hand wringing and recession talk. The reliability of the indicator and equity market performance following inversions are mixed at best.
• Statista published an alarming snapshot of crypto heists dating back to 2014 estimating over $3.1b in theft cumulatively over the past eight years.
• The Administration announced a plan to release strategic petroleum reserves of 1mbpd for a period of six months while reinvesting proceeds in the out years, effectively taking advantage of record high backwardation currently seen in the market.
• The Administration also announced plans to introduce a speculation tax on companies that have federal land drilling
leases but are not producing out of those acres.
• The Administration announced plans, under the Defense Production Act, to support production and processing of key battery inputs (lithium, nickel, cobalt, graphite, and manganese).

Weekly Market Report: March 28, 2022

Last week was the 2-year anniversary of the 3/23/20 Covid low from which we enjoyed an approximate 100% return on
the S&P 500. Last week, financial markets digested a Fed narrative that many felt was more hawkish than the FOMC
meeting narrative the prior week as well as continued Russian aggression in Ukraine and more commodity price
inflation. Equity markets managed to deliver a second consecutive positive week despite Treasury yields moving sharply higher to levels not seen since 2019. The U.S. was up 1.5% while international markets were flat to slightly negative while the yield curve moved higher in a parallel fashion leaving the 10yr UST at 2.48% as we approach quarter-end.

Market Anecdotes

• The selloff in U.S. treasuries continued last week with yields continuing their move sharply higher in a relatively
parallel fashion across the curve while the slope remained. A key question is at what level do higher yields begin
to pressure risk assets?
• Across twelve separate Fed speaking engagements, officials made clear the need for rates to reach neutral and
move into restrictive territory, while maintaining flexibility along the way.
• Arbor Research published a note illustrating the fact that inflation is clearly a global phenomenon with annual
inflation ranging from 42% in South America to 5.7% in Canada.
• Strategas increased the percentage likelihood of recession to 35% due to the economic impacts of Fed tightening,
higher rates, inflation, supply chain disruptions, and commodity price shocks. Meanwhile, yield curve slopes and
economic data continue to paint a constructive picture.
• With such a pronounced two-year return ending March 2022, the third year of a strong bull market does tend to
pose more challenging returns for investors.
• A more strategic (and contrarian) view on Europe given the Ukrainian crisis is that the U.S. economic recovery is
more advanced, leaving Europe with more of a recovery window. U.S. GDP recovered to Q4 2019 level back in 2Q
2021 while Europe reached it finally in Q4 2021.
• Short-term risks surrounding housing are mounting given the rise in interest rates and the impact on
affordability/monthly mortgage payments while long-term fundamentals remain intact.
• European policy makers will attempt to offset the impact of the Ukraine crisis through looser fiscal spending and
U.S. lawmakers have reopened the door to negotiations on the reconciliation package in a slimmed down version
of the initial $3.5t proposal but several roadblocks remain.
• The BCA geopolitical team is assigning a high likelihood that China will help Russia manage U.S. sanctions leading
to U.S. sanctions on China later this year.