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Our Perspective on Recent Market Activities - May 2022

Brian Murphy
Brian J. Murphy, CIMA®
Senior Vice President, Chief Investment Strategist
[email protected]
(585) 419-0670 x41933

Markets rallied following the Fed’s announcement of a 0.50% rate increase on Wednesday, due in part to hearing that larger rate increases were not imminent. But those gains evaporated Thursday as equity markets fell on the realization that the process of normalizing rates is just beginning.

As the year began, investors worried rising rates would be a problem, for bonds as well as stocks. Despite inflationary pressures last year, the Fed kept rates low on the premise that prices would moderate by year end. Instead rates further increased, and pressures mounted as commodity prices spiked following the Russian invasion of Ukraine in late February.

The price increases led to a U-turn in Fed thinking, as they adopted a much more aggressive stance signaling intentions for as many as eight Fed Funds rate increases of 0.25% each by year-end. The result led to significant a sell-off, as both equity and fixed income markets tried to digest the Fed strategy. Bonds, whose prices move lower as yields rise, have had one of the worst 4-month periods in history as fixed income investors moved to the sidelines to mitigate further losses. This led to short-term rates like the 2-year Treasury moving up over 2% quickly, despite the Fed having just started the process of raising rates. With such dramatic increases in yield, bonds have suffered losses not recently experienced by many investors.

Equity prices have also been hit. As yields rise so does the discount rate used to value a stock’s future earnings, making long-term earnings less valuable today. This hits growth stocks especially hard as much of their value may be based on cash flows out many years. Value oriented stocks, especially those with strong dividends, have fared somewhat better due to their near-term cash flows, but have also posted negative return year-to-date.

So where do we go from here? Despite the volatility it’s caused, the Fed needs to continue to raise rates in order to bring inflation in check, but they’re walking a tight rope. If they raise too aggressively, they may slow economic growth too much and create a recession. If they don’t move quickly enough, they run the risk of having inflation embed itself, becoming a longer-term problem.

What the Fed does have going in its favor is a U.S. consumer that’s in good financial shape with above average savings and reasonable debt. Coupled with exceptionally low unemployment, this creates an environment where consumer spending will likely remain strong, and that makes up 70% of GDP. With so many Americans working, and such strong demand for goods and services the chances of a recession should remain relatively low. But markets are forward looking, and volatility will likely continue as they price in future rate increases, as well as an overall deceleration in GDP growth.

In addition, company earnings continue to be strong with most firms ahead of forecast for the first quarter. With the majority of S&P 500 companies having been reported, approximately 79% are ahead of expectations, which is above the 5-year average.1


While this type of volatility, with both equities and fixed income down in unison, can be unsettling, long-term investors are generally rewarded for their patience as asset prices eventually rebound. As noted in the chart, declines similar to what we’ve seen this year are common for equities, but often reverse themselves by year-end. Additionally, while rising rates cause short-term pain for bond holders, the subsequent increase in fixed income yields will help those who rely on bonds for income and will offset some of the effects of inflation over time.

As always, CNB Wealth Management is here to help keep your financial plan on track, and market environments like these may present a good time to review and affirm your long-term goals. Please contact your advisor if you have any questions or concerns.

Data as of 5/6/2022.

Source: 1FactSet, as of 5/6/2022. *Bloomberg, First Trust Advisors L.P., as of 3/31/2022.

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