Investors’ concerns about Federal Reserve members’ comments on the possibility of accelerated rate increases and slowing corporate earnings slammed the Dow on Friday to the worst day since 2020. On Monday in a speech, Federal Reserve Bank of St. Louis President James Bullard raised the prospects of a supersize increase in the fed funds rate from the 0.50% expected to 0.75%, although he did not think it was needed. 1 On Friday, in a discussion hosted by the International Monetary Fund, Chairman Powell thought it was appropriate for the Fed to accelerate rate increases and mentioned the idea of front-loading the increases. Further, he reaffirmed the Fed’s commitment to return the consumer price index to the 2% target.2 On Friday, the market responded with a one-day drop in the Dow of 2.8% and a similar drop in the S&P 500. The Nasdaq suffered a 2.5% one-day drop. For the week, the Nasdaq suffered the worst loss chalking up a 3.83% decline, followed by the Russell 2000 losing 3.21%, the S&P 500 dropping 2.75%, and the S&P 400 MidCap index falling 1.73%. The TSX fell 2.63%, and oil fell 5% in the week, closing at $101.61 per barrel. All sectors of the S&P 500 were down, led by materials down 3.7% and healthcare down by 3.6%. European indexes fell on worries about the war in Ukraine and central bankers’ more aggressive tone in their fight to combat inflation. The pan-European STOXX Europe 600 Index fell 1.42% in the week. Germany’s Dax and the French CAC 40 changed little on the week while Italy’s FTSE MIB Index fell 2.34% and the UK’s FTSE 100 declined 1.24%.
As reported by FactSet, 20% of the companies in the S&P 500 have reported earnings. Of those reporting companies, 79% are beating EPS estimates above the five-year average. Unfortunately, earnings growth is 8.1% above estimates but below the five-year average of 8.9%. The financials, communication services and energy sectors are the most significant contributors to the increase in the earnings growth rate. In terms of revenues, 69% of the reporting S&P 500 companies exceeded revenue estimates, and the energy sector is the largest contributor to improving revenue growth. 3
On Thursday, the US Labor Department reported initial claims decreased by 2,000 from the previous week to 184,000. Claims for all benefit programs for the period ending April 2 were 1,622,094, a decrease of 88,031 from the previous week. Twelve months ago, the weekly claims were 17,394,057.4
Also last Thursday, the Philadelphia Federal Reserve reported its gauge of regional business activity fell to 17.6 in April from 27.4 in March. (Any number above 0 is an indication of growth). Firms reported increases in employment and general cost pressures. Current activity, new orders, and shipments are all down from the previous month’s reading but remain positive. The survey respondents continue to expect growth over the next several months. 5
The US Conference Board Leading Economic Index increased 0.3% in March but signaled some areas of trouble ahead. At the same time, the indicators suggest likely expansion throughout the summer, high inflation, labor and supply shortages, and rising interest rates limiting or capping potential growth. The Conference Board said the measure of current economic conditions rose 0.4% in March, and the lagging indicator was up 0.6%. The consumer is still spending, and with tight labor market conditions, indications are for economic growth to continue for the balance of the year.6 The S&P Global US Manufacturing PMI (flash) and the Global Services PMI (flash) indexes were reported on Friday. The manufacturing index improved, moving to a seven-month high of 59.7 from 58.5. The service index decreased to a three-month low of 54.7 from 58.0. While sales appear to be strong in the face of higher prices, S&P found customer demand waning. Again, concerns over inflation and the general cost of living seem to be taking a toll on consumers. 7
Sources:
4 https://www.dol.gov/ui/data.pdf
5 https://www.philadelphiafed.org/surveys-and-data/regional-economic-analysis/mbos-2022-04
6 https://www.conference-board.org/topics/us-leading-indicators
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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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