- A Challenging Time. Global equity markets saw another down month in April, but will end May about flat. It is premature to suggest we have bottomed, however. The continuing storm of high inflation, central bank tightening, geopolitical crisis, and an uncertain earnings outlook have contributed to overall risk-off sentiment. Bonds followed a similar trajectory, down in April with some recovery in May.
- Higher Prices. High inflationary pressures continue to be an overhang on the market. The latest consumer price index (CPI) report showed inflation increased by 8.3% over last year. Energy and food costs are notably higher, and felt through the economy. Energy has pushed higher not just by the conflict in Ukraine, but also by years of underinvestment in drilling and refining capacity. Food has suffered from a slew of higher input costs.
- Fed Tightens. To keep inflation under control, the Federal Reserve is now playing catch-up by reversing its monetary policies and raising interest rates. In June, they will start reducing the money supply, too. The Fed’s goal is to dampen consumer demand to cool inflation, but not dampen so much as to tip the economy into recession.
- Supply Chain. The global supply chain remains under stress. Port bottlenecks have begun to clear, and companies are somewhat more upbeat regarding supply and parts availability. US retailers are dealing with an excess of inventory, in fact. The global semiconductor shortage appears to be improving, as another example. However, fresh covid-related shutdowns in China have likely brought on another wave of supply chain disruption that will be felt in global markets in coming weeks.
- Economy is Resilient. Despite the present challenges, fundamentals of the economy are mostly solid at present. Businesses, and households, remain on a strong footing. The labor market continues to have substantial positive momentum. Major industries like housing and autos have been severely supply constrained, and even though interest rates have risen, we expect consumer demand to continue. Corporate profit levels and margins remain high.
- Market Outlook. In contrast to a jittery market, corporate earnings remain firm, with little signs of an imminent economic slowdown. The market’s decline, so far, is almost entirely due to lower stock prices, not tied to lower earnings. Our expectation is for moderating growth from the economy’s present strength. Consumers are changing their spending patterns out of sheer necessity, and we are fast-cycling the economic adjustments to bring down inflation. We expect the inflation story to improve organically as the extraordinary money growth of the past two years abates, while supply chains improve. We see the greatest continuing risk in energy and food costs remaining volatile.
