Regarding Market Madness
Greetings, Danny here.
There is rarely a single answer for why markets do what they do, why stocks rise and fall, or why investor sentiment changes from one day to the next, but there are many issues currently driving the markets. To put it bluntly, all roads lead to the Federal Reserve.
We have no way to know how quickly US inflation will cool, what the Federal Reserve monetary policy will be through this process, or what effect the combination of these factors will have on the US economy and corporate profits in H2 2022 and 2023.
The market is so volatile precisely because the band of possible outcomes is too wide. Below we detail Three Key Points to be aware of:
Key Point #1
Inflation is at a four-decade high and April is the first monthly easing of inflation since August 2021. The Federal Reserve is committed to reducing inflation by raising interest rates and using forward guidance to reduce goods and services. The consumer-price index (CPI) slight improvement in April numbers augurs well.
Key Point #2
As the war in Ukraine drags on and Western sanctions against Russia tighten, the prospect of normalization in energy prices is receding, raising the conflict’s toll on global economic growth, with Europe looking particularly vulnerable.
Because it’s difficult for many people to reduce their energy consumption, economists expect the higher prices for electricity, heating fuels, and gasoline to constrain how much households can spend on other goods and services.
Key Point #3
Solid earnings aren’t saving the market – the focus is on the macro. The Federal Reserve is tightening its monetary policy and all eyes are on its effect on the US economy and oil prices. Price-to-earnings multiples have declined faster than profits have grown. The macro pressure has been especially strong in growth-oriented areas of the market, such as technology. As a result, despite strong earnings, the market is declining. However, earnings are the best predictor of long-term market returns, so there are good reasons to remain optimistic. We list five more below.
5 Key Positive Takeaways
1. US unemployment is low – companies are still hiring and wage growth is solid, thus a deep 2022 recession is unlikely.
2. Now that the Federal Reserve took 25 basis points off the table for now, investors may finally have a perspective on future Fed Reserve policy – reducing “known unknowns.”
3. With a 1.44% spread between corporate and government bonds, equities are stressed, and bond markets are not, which is a good sign.
4. With oil at $100 a barrel, oil has stabilized, which decreases inflation (although the Ukraine War continues to be an overhang).
5. There is little uncertainty about the US midterms election, with Republicans slated to win both houses.
We’re Here to help
We remain cautious about how monetary policy may impact the US economy and corporate profits in the short term. Once the veil lifts, and it will, equities will move higher.
If you have any questions, please don’t hesitate to schedule a free consultation.
Thanks and regards,
Danny
Life-centered Planner