Equities Struggle With Higher Costs – Global Equity Overview

Major equity indices ended the first four months of the year in negative territory. The S&P 500 Index fell 13.3%, the Dow Jones Industrial Average lost 9.25%, and the Nasdaq was down over 21% for the first four months of the year. The best performing sectors included defensive stocks such as energy, food, and utilities, which include companies providing essential products and services.

Numerous companies are becoming hesitant about passing higher costs along to consumers, concerned that customers might buy from competitors instead. This leads to lower margins for companies which eventually affects earnings, the primary driver of stock prices.

A strong dollar is weighing on U.S. multinational firms whose earnings are negatively impacted as their goods and services become more expensive internationally. (Sources: Fed, Bloomberg, Dow Jones, S&P, Nasdaq)

Rates Rise As The Fed Tightens – Fixed Income Update

Global bond yields rose in April, with both government and corporate bond yields rising across various international regions. Numerous analysts believe that the Fed may be raising rates too fast in response to inflation data that may have caught the Fed off guard. Should economic growth start trending lower, the Fed is expected to possibly slow its rate and amount of increases.

Yields across most bond maturities flattened out in April, a dynamic known as a flattening yield curve, indicating uncertainty in the direction of interest rates. Some analysts attribute this to the extent of inflationary expectations and how long inflation may last.

Some analysts and economists believe that the Federal Reserve’s trajectory of raising interest rates may be too aggressive and lead the country into a recession. Prior Fed rate hikes have historically been accomplished during periods of strong economic expansion, which is not the case now. (Sources: Federal Reserve, Bloomberg)

Wage Increases Can’t Keep Up With Inflation – Labor Market Overview

The most recent wage data released by the Labor Department showed a 5.7% increase in wages for the past year, yet still below current inflation annualizing 7.5%. With inflation outpacing wage growth, workers and consumers alike are experiencing shrinking discretionary income. Such dynamics reduce the purchasing power of consumers, making it difficult to maintain customary spending habits. Some economists believe that wage increases may be ending soon as companies may start to trim employee expenses and even start reducing staff should a recessionary environment evolve.

The Department of Labor tracks wage growth versus inflation as average real hourly earnings, which subtracts inflation from gross wages. Even though wages grew at an annualized rate of 5.7% from January 2021 to January 2022, wages still didn’t keep up with the rising costs of various food items over the same period.

Sources: Department of Labor

U.S. Economy Slowed Down In The First Quarter – Domestic Economy

Domestic economic growth, as measured by GDP, turned negative for the first time since the second quarter of 2020, when the pandemic was in full swing. Initial reports indicated that a drop in exports was to blame, but many economists believe that a downward trend may have begun to form.Economists view a number of factors affecting growth in the U.S. economy, with no sole reason for any possible slowdown. Contributing to a pullback in expansion include exhaustion of pandemic relief funds, rising interest rates, inflation, lower disposable income, and uncertainty surrounding Covid infections. (Source: Bureau of Labor Statistics, Bloomberg)

Strengthening U.S. Dollar May Help Curtail Inflation – Consumer Inflation Dynamics

The U.S. dollar has risen over 7% since the beginning of the year driven by increasing interest rates and a flight to safety for international investors. A stronger dollar can also be a hindrance for certain U.S. companies that have a large portion of their sales overseas. Should the dollar continue on its rising trend, economists and analysts believe that the run up in the dollar will translate into lower earnings for a number of U.S. companies. Foreign investors tend to flock to the U.S. dollar as rates increase, seeking higher returns on idle cash, and during periods of geopolitical turmoil.
 
A challenge that emerges for U.S. multinationals when the dollar rises, is that the price of U.S. exports become more expensive worldwide. As the dollar increases in value versus other currencies, U.S. exported goods become less affordable in the international markets. Conversely, the strengthening dollar has also made imported goods into the United States more affordable, which become less expensive for American consumers as the dollar rises. (Sources: https://fred.stlouisfed.org/, Bloomberg, Commerce Department)