Equity Overview

All sectors declined except consumer staples.  All investment styles (e.g. value, growth, momentum, etc.) declined except volatility plays, as the S&P 500 moved more than 1% on 10 of 20 trading days.  Growth stocks bore the brunt of the downturn as they sustained double-digit losses at all capitalization levels.

Notwithstanding stock price performance, first quarter earnings reported in April were strong.  With 55% of S&P 500 companies reporting, 80% beat consensus earnings expectations and 72% beat consensus revenue expectations (in both cases, above the five-year average but below the one-year average).  However, the market rewarded beats less than usual and punished misses more severely.

Macro Overview

Economic data reported in April was mixed.  Employment was strong as U.S. employers added 431,000 jobs and the unemployment rate fell to 3.6%.  Manufacturing and durable goods orders were generally positive, and consumer sentiment improved.  But inflation continued unabated as the Consumer Price Index rose 8.5% year-over-year, the highest increase since 1981.  The housing market was lackluster as rising interest rates inhibited sales.  And the Commerce Department reported that first quarter GDP declined 1.4%, an unwelcome surprise as analyst consensus called for GDP to be unchanged.

The war in Ukraine raged on.  While Ukraine repelled Russia’s attempt to capture the capital Kyiv in central Ukraine, forcing Russia to retreat and regroup in the east, both sides now face the prospect of a grinding conflict with no clear path to victory.  Meanwhile the disruption to oil supplies has severely reoriented pricing, with $100 per barrel the apparent new benchmark.  And the loss of grain reserves now threatens famine in less advantaged countries such as Ethiopia which rely on Ukraine for most of their supply.

The reappearance of Covid in China represents a new challenge to the world economy.  The government’s “zero Covid” response has shut down cities large and small, most notably Shanghai with a population of 23,000,000, causing factory closures across a range of industries including microchips. The impact on the global supply chain is serious, and is causing companies to reassess reliance on China for manufacturing.  One notable example:  Apple sources 90% of its products in China and is exploring a shift to more production in India and Vietnam.