by Jonathan Susser, Investment Technology Associate Markets notch first positive week in eight weeks. Fed takes a dovish pivot with two Federal Reserve Bank Presidents walking back an aggressive Fed.
Markets (as of May 27, 2022, Weekly Returns, Year-To-Date Returns)
Global Economy
U.S. allies are pushing back against a Chinese proposal for deeper security and trade ties in the Pacific, a region that has long been a point of contention between Washington and Beijing. They warn this is an attempt by China to gain control over the region and wrest loyalties from the U.S.
The U.S. Central Bank is weighing the possibility of introducing digital currency to provide consumers safety amidst a sea of cryptocurrency stable coins.
Policy and Politics
Robert Califf, head of the U.S. Food and Drug Administration proposed a national stockpile of baby formula in order to better prepare for potential future shortages.
Antony Blinken reiterated that the Biden administration is committed to bolstering domestic investment and strengthening ties with allied countries in order to counter China via an inclusive, transparent international policy.
What to Watch
Case-Shiller Home Price Index: National figures are set to release on Tuesday, May 31st at 9:00 AM EST.
U.S. Crude Oil production figures are being released on Tuesday, May 31st at 3:30 PM EST.
U.S. Recession Probability Index to release latest update on Wednesday, June 1st at 11:00 AM EST.
ADP Nonfarm Payrolls to be announced on Thursday, June 2nd at 8:15 AM EST. US Nonfarm Payrolls to follow on Friday, June 3rd at 8:30 AM EST.
THE NUMBERS The Sources: Index Returns: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized. Interest Rates: Federal Reserve, Mortgage Bankers Association.
MARKET HEAT MAP
The health of the economy is a key driver of long-term returns in the stock market. Below, we assess the key economic conditions that we believe are of particular importance to investors.
US ECONOMY
CONSUMER HEALTH
NEUTRAL
Q1 2022 Real GDP shrunk at a 1.4% annual rate according to the first advance estimate. This is the first contraction since the beginning of the pandemic. The main factors that resulted in a decrease in GDP were a surge in imports and trade deficit highlighting that the U.S. is buying more goods from foreign countries. This may be an indication that the U.S. economy has recovered faster than other countries.
CORPORATE EARNINGS
NEUTRAL
For Q1 2022 the estimated earnings growth rate is 9.1% — the lowest since Q4 2020 (3.8%). This estimate was revised upward from the previous forecast of 7.1% in April. So far, 95% of S&P500 companies have reported earnings — 77% reported a positive EPS surprise and 73% beat revenue expectations.
EMPLOYMENT
POSITIVE
Total nonfarm payroll employment rose by 428,000 in April compared to an estimated 398,000. The unemployment rate remained constant at 3.6%. Job growth was widespread, led by gains in leisure and hospitality, manufacturing, and transportation and warehousing.
INFLATION
NEGATIVE
CPI rose 8.3% year-over-year in April 2022, compared to an estimated increase of 8.1%. Core CPI recorded a 6.2% increase, and PPI increased by 11%. Shelter, food, airline fares, and new vehicles were the largest contributors to the soar in CPI. The energy index fell for the first time in recent months — gasoline decreased by 6.1% while natural gas and electricity increased.
FISCAL POLICY
NEUTRAL
After passing a $13.6 billion package to support Ukraine a few weeks ago, the House approved an additional $40 billion military and humanitarian package for Ukraine. The bill was passed with 368 votes against 57 votes. The total of the two packages ($53 billion) is the largest foreign aid moved through Congress in over 20 years.
MONETARY POLICY
NEUTRAL
The Fed raised rates by the expected 25 bps in March and 50 bps in May. Jay Powell projected a clear path for 2022 with as many as five additional rate hikes. The next decisions by the Fed will be data-driven based on future inflation numbers and estimated economic growth.
GLOBAL CONSIDERATIONS
GEOPOLITICAL RISKS
NEGATIVE
Russia was able to avoid default last week by making the required payment on its debt however, the markets are still assessing the probability of default in the coming months at 87%. This is primarily due to sanctions imposed by Western countries which are hindering the Russian economy and restricting capital flows in and out of Russia.
ECONOMIC RISKS
NEUTRAL
Supply chain disruptions in the U.S. are waning but the rising cost of oil due to the Russian- Ukraine war is likely to cause additional inflationary pressures not only on gasoline prices but also on many other goods and services. China is targeting June to end the Shanghai Covid-19 lockdown in hopes to revive its economy.
The “Heat Map” is a subjective analysis based upon metrics that VNFA’s investment committee believes are important to financial markets and the economy. The “Heat Map” is designed for informational purposes only and is not intended for use as a basis for investment decisions.
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