Review the latest Weekly Headings by CIO Larry Adam.
- Must look at the contributors & detractors of economic growth
- The Fed needs to reload its monetary policy toolkit
- Earnings may stabilize growing investor pessimism
Will 'April showers bring May flowers' for the equity market? It may be hard for some investors to imagine that being the case given the bouts of volatility that equities have faced since the start of the year or just this week alone. Over the last few days, the S&P 500 reentered correction territory as it tried to weather the storm of headlines. But even as the war in Ukraine, COVID lockdowns in China, fears of slowing global economic momentum, and concerns of aggressive central bank tightening rain down on investor sentiment, we still believe that the equity market could regain the spring in its step. In fact, with the latest AAII Investor Intelligence survey recently declining to the lowest level since 1992, we think much of the bad news has already been priced into the market.
- Bottom Line – Looking Past The Clouds | There is no denying there are viable risks to the global economy and financial markets, especially as reinstated COVID restrictions in China once again threaten global supply chains and the war in Ukraine extends into a third month, prolonging the elevated prices for key commodities. However, this storm of volatility may pass soon as we near the maximum pressure points for economic concerns, inflation, Fed hawkishness, long-term rates, and according to the New York Fed’s global supply chain index, a possible inflection point for supply chain disruptions. While that’s not to say that we expect clear skies tomorrow, as continued uncertainty surrounding these developments is likely to keep the S&P 500 range bound (4,200-4,600) in the near term, we still forecast the index moving higher toward our year-end target of 4,725.* On the premise of the positive catalysts mentioned below, we’d view any weakness at the lower end of the aforementioned range as an opportune time to buy.
- US Economic Barometer Not Indicating A Recession | Consensus estimates for 1Q22 GDP were fairly weak (+1.1%), but Thursday’s preliminary reading actually reflected a decline of -1.4%.* While this wasn’t the result investors were hoping for, there are two important things to remember. First, it is backward looking. And looking back on the first quarter of this year, our nation suffered its worst surge in COVID cases yet (which has since improved) and Russia invaded Ukraine. Second, it is important to look at the underlying contributors and detractors of economic growth. For example, stronger imports, which are indicative of domestic demand, subtracted over 3% from headline growth. Even more important, there is evidence that the strength seen in personal consumption and business fixed investment has carried over to this quarter. Real-time activity metrics are at post-COVID highs, labor market conditions are improving, and elevated levels of consumer spending and corporate capital expenditures should support a healthy fundamental backdrop for equities.
- Fed Needs To Prepare For The Next Storm | The Fed needs to take advantage of raising interest rates in the current environment, not just to tame inflation, but for the purpose of reloading its monetary policy toolkit for the future. The previous economic expansion was the longest on record, and the Fed had just started to increase rates before the COVID-19 pandemic emerged. Through a number of unprecedented actions, it was able to help the economy avoid the worst case scenario. Now that the economy is on solid footing, the Fed needs to reposition itself so that it can have flexibility with its monetary policy decisions for the next contraction—which in our view, is not now. So as much as hawkish action by the Fed has caused alarm in the equity market, investors should have some level of comfort in knowing that the Fed will be prepared should an economic downturn ensue. Look for the Fed to raise interest rates 50 bps at its meeting next week.
- Earnings Are Not Under The Weather | For an earnings season that was supposed to be lackluster in comparison to the record quarters seen in 2021, its robustness has been a silver lining amidst the recent equity market volatility.* While a few high-profile companies have disappointed with their earnings, the commonality is that they were beneficiaries of the stay- at-home-trade. In aggregate, the 1Q22 earnings season has been very solid with strong revenue growth, healthy beats, and favorable forward guidance. Perhaps one of the most notable trends, is that 2022 consensus S&P 500 earnings have been revised up ~2.8% (from $221.80 to $228) since the start of the year.* This is unusual from a historical perspective as earnings are typically revised down ~3.1% on average at this juncture. This upward revision—which has lifted full year S&P earnings growth to 10.5%—combined with year-to-date declines in the S&P 500 (-9.6%), has made equities more attractive from a valuation perspective. In fact, the next 12-month P/E for the index (17.8x) is now well-below the previous 5-year average (19.0x). With next week being the second of the two busiest weeks of earnings season, we expect positive reports to provide further stabilization to an equity market that has become increasingly attractive for long-term investors.
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All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Past performance may not be indicative of future results.