Weekly Market Commentary | 6 May 2022

    We have seen better days

    US Equity markets finished the first week of May in the red: S&P 500 and the Dow lost 0.2% over the week while the Nasdaq composite lost 1.5%. US stocks started the week on an optimistic note, recording three straight positive sessions before plunging on Thursday and Friday following the FOMC decision. Investors were nervous about the Fed’s ability to rein in inflation without tipping the economy into a recession. 

    What spooked the markets? 

    Russia’s invasion of Ukraine, inflation, stock market volatility, inflation, and rate hikes have all affected investor sentiment negatively. Markets are having a tough time reacting to the removal of support from the Fed, a policy path that has been discussed at length for much longer than last week. According to research from American Association of Individual Investors, the percentage of individual investors describing their six-month outlook for stocks as “bearish” surged to its highest level since 2009. Historically, the S&P 500 index has gone on to realize above-average and above-median returns during the six- and 12-month periods following unusually low readings for bullish sentiment and for the bull-bear spread. Unusually high bearish sentiment readings historically have also been followed by above-average and above-median six-month returns in the S&P 500.” 

    Jobs growth figures shows the US economy is still going strong

    The latest NFP (non-farm payrolls) released every first friday of the month showed a gain of 428k jobs in April. This matches the figure we saw in March and similarly, gains have been broad-based , across industries but concentrated in the service sector. The unemployment rate remained at 3.6%, close to pre-pandemic levels. Prior to 2019, gains of around 200k would be regarded as a stellar jobs report. 

    Source: Bloomberg 

    Almost two job openings for each unemployed person

    The US economy has made up for 95% of 22 million jobs lost during the height of the pandemic. However, labor supply has not caught up fully, there are now 1.9 job openings for each unemployed person seeking employment. Businesses have had a hard time finding workers as they try to meet demand for goods and services. This has led to strong wage growth for individuals – average hourly earnings at 5.5% higher than a year before but with inflation (measured by the Fed’s preferred indicator PCE: personal consumption expenditure) running at 6.6% for the same period, workers are not necessarily feeling that the good times are here. 

    Double Hike

    Sustained price increases have not all been demand driven. Russia’s invasion of Ukraine and lockdowns in China have added to those price pressures. To stem inflation, the Federal Reserve raised its benchmark interest rate by 0.50%, a double hike, and the biggest increase in twenty years. Front-loading of rate hikes will (hopefully) slow down demand by increasing borrowing costs, before inflation gets even more difficult to control. Fed chair Jerome H. Powell stated that more double hikes would be “on the table”, but dismissed the idea that the committee is “actively considering” even larger hikes (0.75% and above). 

    Is this going to cause a recession? 

    Financial markets have been roiled by both the prospects of double hikes and what if the Fed is unable to get inflation under control. This may seem like a paradox, but the Fed is effectively trying to tap on the brakes to slow down the economy  without tipping it into a painful recession. In the press conference after the May FOMC meeting, Powell states that “Everyone will be better off if [the Fed] can get this job done – the sooner the better”. However, the tools the Fed has access to, despite being very powerful, are actually quite blunt and imprecise. Powell acknowledged this in the press conference in response to a reporter; the Fed essentially has “ interest rates, the balance sheet, and forward guidance, and they’re famously blunt tools.”. The shift to higher rates may not be straightforward and the path there will be met with obstacles but the aim is to do it while achieving a prolonged expansion. 

    China: delisting list grows

    Last week, the SEC expanded the list of entities facing possible delisting from US exchanges. The electric vehicle sector in China sold-off heavily as firms like Nio and XPeng were added to the list. At the same time, Reuters reported that officials from the US Public Company Accounting Oversight Board (PCAOB) have arrived in Beijing to attempt to settle the issue of audit reviews for US-listed Chinese companies and avoid delisting. This is a significant first step to untangling the audit requirements for US-listed firms. 

    Earnings spotlight

    According to research from FactSet, out of the S&P 500 companies that have reported earnings so far for Q1 2022, the majority beat consensus EPS expectations. The blended year-on-year earnings growth for the index in the first quarter came in at 7.1%. Excluding Amazon, the S&P 500 would be clocking double digit earnings growth (10.1%) in Q1 2022.  

    We covered market movers here

    What’s Ahead

    So far more than 85% of companies in the S&P 500 have reported Q1 2022 results. Out of those, according to research from Schwab, 79% have beat EPS estimates while 67% have beat revenue estimates. 

    Where could markets go from here? 

    Risks to growth have increased lately but the worst case scenario has not materialized. Companies and households are entering this next stage of the economic cycle with good fundamentals and strong balance sheets (and wide profit margins vs. historical levels for many corporations). Previously, we saw a divergence in expectations from bond and equity investors: where the former appears less optimistic but now after equity markets sold off, expectations are more aligned. 

    While growth may be held back by persistent inflationary pressures in the short term, investors can take a diversified approach: seeking balance between value and growth, and US and international. During times of market volatility, it becomes even more important to pay greater attention to the things one can control: diversification, asset allocation and cost. 

    Equity Price Level and Returns: All returns represent the total return for stated period. MSCI ACWI: Global equity index provided by Morgan Stanley Capital International (MSCI). S&P 500: Market capitalization index of U.S stocks provided by Standard & Poor’s (S&P). Dow Jones: Price-weighted index of U.S stocks provided by S&P. NASDAQ: Market capitalization index of U.S stocks provided by NASDAQ. Euro Stoxx 600: Market capitalization index of stocks listed in European region. MSCI Asia Ex Japan: Asia excluding Japan equity index provided by MSCI. MSCI EM: Emerging markets equity index provided by MSCI. SSE: Capitalization weighted index of all A-shares and B-shares listed on Shanghai Stock Exchange. STI: Market capitalization index of stocks listed on Singapore Exchange. SREITLSP: Market capitalization index of the most liquid real estate investment trusts in Singapore.

    Fixed Income Yield and Returns: All returns represent total return for stated period. U.S. Aggregate and SBIF from Bloomberg.

    Key Interest Rates: 2-Year U.S Treasuries, 10 Year Treasuries, Bloomberg. 3-month SIBOR: Singapore Interbank Offered Rates provided by Association of Banks in Singapore (ABS). Oil (WTI): Global oil benchmark, Bloomberg. Gold: Gold Spot USD/Oz, Bloomberg. Bitcoin/USD, Bloomberg. VIX: Expectation of volatility based on S&P index options provided by Chicago Board Options Exchange (CBOE).

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