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Weekly Market Recap

Last week was another challenging period for US equities as investors repriced the risk of a near-to-medium term US recession. Incoming macroeconomic data was mixed, but generally supported the notion that recession risk is rising:

  • Empire Manufacturing turned sharply negative in May (-11.6)
  • NAHB Housing Market Index fell to 69, the lowest since June 2020
  • Housing Starts (1.7m) and Residential Building Permits (1.8M) fell sequentially
  • Philly Fed Business Outlook (2.6) fell to its lowest level since May 2020
  • Initial jobless claims (218k) hit a 4-month high
  • The Conference Board’s Leading Index (LEI) fell sequentially by 0.3% in April

Consumer stocks were especially hard hit last week after disappointing results from retail bellwethers Walmart and Target. A few defensive sectors managed to eke out positive returns, including healthcare, utilities, and energy (the “special 2022 defensive”).

Rates fell in the belly and long end of the curve, sending most Treasuries higher. Credit spreads widened considerably though, resulting in muted price gains for investment grade corporates and steep losses in high yield bonds.

Meanwhile the US dollar weakened slightly after reaching multi-decade highs during the prior week, bucking the “flight-to-safety” trend in most asset classes. And finally, energy prices rose anew, with oil adding nearly $3/barrel, natural gas rising above $8/MMBtu, and unleaded gasoline prices reaching yet another all-time high in the US.

Chart of the Week – Conference Board Leading Economic Index (y/y change)

Economy & Earnings – Annualized US GDP growth fell to -1.4% in Q1 on headwinds from trade, private investment, and government spending. Personal consumption remains strong, however, suggesting growth should resume for the balance of the year. Consensus 2022 GDP stands at +2.7%.

Equity Valuation – The S&P 500’s fwd P/E of 16.4x is above the historical average, and long-term valuation metrics like CAPE (cyclically adjusted P/E ratio) suggest that compound annual returns over the next decade are likely to be in the single digits. That said, many growth stock valuations are at multi-year lows after the recent selloff, suggesting future returns in some sectors could be above-average.

Interest Rates – Rates have risen across the curve in early 2022 as the market prices in a number of Fed Funds rate hikes. Fed Fund Futures markets are currently pricing in a total of ten or eleven 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 2.50% – 2.75% by year end.

Inflation – Inflation is currently high on a y/y basis as supply chain disruptions, labor shortages, and rising energy prices have impacted input costs for many businesses. The Fed has begun raising overnight interest rates in order to tame inflationary pressures.