Equities Struggle – Global Equity Overview

Major equity indices ended the first four months solidly in negative territory. The S&P 500 Index fell 13.3%, the Dow Jones Industrial lost 9.25%, and the Nasdaq was down over 21% for the first four months of the year.  As of today’s writing (May 15th), the market is down nearly 20% – adding to the decline.

It is my strong belief that the current stock market correction is likely approaching a completion.  Admittedly, the correction has been a bit deeper and more proacted than I had anticipated when in late December I forecasted a market decline developing in the first quarter.  Honestly, there is still some short-term downside risk, but the risk is offset by the upside opportunity for the remainder of the year.  Once the market stabilizes and risk taking reemerges, I believe the SP500 (broad stock market) will move towards 5000 – perhaps as high as 5175-5500.  For perspective, the SP500 currently stands at roughly 4000.  This will likely mark a meaningful long-term completion of what has been a protracted bull market.  Should the market achieve these levels, this will likely become a significant “high-water mark” or “inflection point” that will warrant a much more guarded and defensive future investment posture.  My tentative timeline is roughly the first half of 2023 for this to fully mature.

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.  As I reiterated last month, in retrospect, it appears that the Federal Reserve is behind the inflation curve and that the Inflation Genie is out of the bottle.  The last real battle we had with inflation was during the early 1980’s – and that required meaningfully higher interest rates before the Inflation Genie was put back in the bottle.  Does anyone remember the name Paul Volcker?  I sure do.

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 clearly not the case now.  It’s my opinion that the Federal Reserve would rather create a broad recession than allow the emergence of persistent inflation and its very negative economic implications.  I think eventual recession is the likely path we find ourselves on today, and as prudent investors, we will eventually need to greatly reduce or eliminate stock exposure (reduction/elimination not much later than the first half of 2023).  This is the most sobering conversation I’ve shared since 2007, but as usual, we will take proactive, preemptive, disciplined and methodical steps to mitigate investment risk should these negative trends further develop.

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.  Even though wages grew at an annualized rate of 5.7% from January 2021 to January 2022, wages still didn’t keep pace with costs.

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)