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04/11/22

Sightline Weekly Market Update: Fed Indicates Accelerated Tightening Ahead

All major indices struggled and finished the week lower on worries of a recession, inflation and the situation in Ukraine. The Fed released the most bearish minutes since Paul Volcker slamming Nasdaq and small-cap stocks. Sector performance was mixed, with the consumer staples and healthcare, which were considered defensive, gaining, whereas technology, consumer discretionary and communication services suffered steep declines. The TSX remained primarily flat, losing only 40 basis points despite crude oil losing 1.4% in the week. The Dow Jones slid 28 basis points while the S&P 500 lost 1.30%, the Nasdaq dropped 4.18%, the S&P MidCap 400 declined 3.69%, and the Russell plummeted 5.09%.

In Europe, while the pan-European STOXX Europe 600 gained 0.57% in local currency terms, the largest of the continental markets lost ground. The German Dax index fell 1.13%, France’s CAC 40 fell 2.04% on election fears, and Italy’s FTSE MIB Index lost 1.37%. The UK managed a gain of 1.75%. The election in France could be a bell weather of what is to come in other European elections. President Macron’s lead in the polls significantly narrowed to the second-place challenger Marine Le Pen, the right-wing candidate. The first round of voting takes place on Sunday, and based on the latest polling, it is highly likely for a second-round runoff election on April 24 with the top two candidates.1

There was little economic data in the week other than the initial unemployment claims, which fell more than expected, reaching the lowest level since 1968. For the week ending April 2, 2022, initial claims were 166,000 compared to the previous week’s revised slightly higher to 177,000 and the expected 200,000. Continuing claims for all programs for the week ending March 19 were 1,723,024, a decrease of 52,806 from the previous week.2 With Q1 earnings season about to begin, FactSet lowered their December estimated earnings growth for the S&P 500 to 4.5% from 5.7%. If 4.5% is the actual growth rate, it will be the lowest level since Q4 2020 and confirm the economy’s anticipated slowing. Sixty-seven of the S&P 500 companies have issued negative guidance, with 29 companies giving positive guidance. The valuation for the forward P/E ratio for the S&P5 00 is 19.2 above the 5-year and 10-year averages of 18.6 and 16.8, respectively.3

Last Tuesday morning, comments by Fed Governor Lael Brainard sent shivers through the markets in a speech that emphasized the importance of getting inflation down. She went on to say, “the Committee will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting.”4

Later in the day, Federal Reserve Bank of Kansas City President Esther George stated further that the pace of accommodation based on the current level of the Fed’s balance sheet and the conditions of the economy could “easily argue for going faster and moving along at a quicker pace than they did before.”5 These comments sent a flurry of analysts wondering if the Fed would raise rates to the point of pushing the economy into a recession. One closely watched indicator is the two-year/10-year Treasury rates. When this curve inverts, as it did the week before last briefly, it raises concerns of a coming recession, as does the five-year/ 30-year, which remained negatively sloped at week’s end.

Over the coming weeks and months, investors will have to come to grips with higher rates targeting inflation, businesses with supply-chain issues, unsettling geopolitical events, elections, increasing Covid cases, and the potential for a return to lockdowns led by China. It certainly would seem 2022 will be a tumultuous year.

Sources:

1 https://www.theguardian.com/world/2022/apr/08/france-elections-macron-lead-over-le-pen-narrowing-vote-nears

2 https://finance.yahoo.com/news/weekly-jobless-claims-week-ended-april-2-2022-174901498.htmlhttps://www.dol.gov/ui/data.pdf

3https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_040822.pdf#:~:text=The%20estimated%20earnings%20growth%20rate%20for%20the%20S%26P%20500%20for,the%20start%20of%20the%20quarter

4 https://www.federalreserve.gov/newsevents/speech/brainard20220405a.htm

5 https://www.youtube.com/watch?v=36-s1oRNVqg&ab_channel=BloombergMarketsandFinance

 

Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors primarily through fee-based accounts.

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