Roller Coaster Ride Continues
Wow, what a difference a month makes. After jumping 8.6% from the lows of March the S&P 500 again reversed course and dropped another 8.8% in April to finish -13% year-to-date.
Why the Wild Gyrations?
Investor fears were high heading into the Fed’s March 16th announcement. While the Fed news was incrementally more hawkish, it was better than expected. Investors, still trained to buy the dip, piled in.
However, earnings season has been a disappointment so far, driven by a host of issues including: Post-Covid hangovers (NFLX is the poster child here); future extension of supply chain issues due to lockdowns in China (e.g. AAPL); and excess capacity issues (AMZN). All in, it became marginally more difficult for companies to meet earnings expectations for 2022.
This brings us to the second reason for the drop in equities, Fed expectations. Ten Year U.S. Treasury Yields rose to nearly 3% in April, something we have not seen since 2018 (Exhibit 2).
Once again, investor anxiety is running high prior to the Fed announcement on May 4. In fact, the setup is very similar to the prior meeting, with equities compressed like a spring by fear of continued Fed hawkishness. The key question for the meeting is whether the Fed will push fed funds beyond 3%, the perceived upper bound of neutral rates. Neutral being the imaginary mid-point where Fed policy is neither accommodative nor restrictive to economic growth.
Futures markets are already pricing in 3% fed funds for the end of 2022 (note that is roughly equal to the 10 Year which would cause a further flattening of the yield curve). Any mention that the Fed is not looking to go beyond that level will be met with the release of the equity spring in the short term.
Beyond that, the crystal ball gets cloudier. If core inflation decelerates, the Fed will have more room to maneuver, decreasing the need to push rates beyond neutral and crimping both economic growth and inflation. Additionally, the economy remains robust with strong wages and labor. This may continue, which would lead to continued earnings growth. Alternatively, higher, or more persistent core inflation will push Chair Powell to a Volker-moment, which will put continued pressure on equities.
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This market commentary was written and produced by Stableford Capital, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX: The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.