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Market Commentary: May 10, 2022
Tim Hoyle, CFA, Chief Investment Officer
THE FEDERAL RESERVE IS IN NEED OF AN ASSIST
The stock market selloff is the result of investors grappling with inflationary concerns, higher interest rates, and the increasing probability of a recession following the Federal Open Market Committee’s 50-bps hike and subsequent press conference last Wednesday. As Jerome Powell alluded to at his press conference, the American people are relying on the Fed to quell inflationary expectations without pushing the economy into recession. I do not envy their position.
On Friday, Minneapolis Federal Reserve President Neel Kashkari published an essay containing an uncomfortable truth. It is his belief that if ‘supply chains’ — which has become a catch-all phrase for all economic supply, from labor to oil – don’t improve, the Fed will have to bring demand down (i.e. initiate a recession) in order to balance inflationary pressures. Put another way, the Fed needs an assist if they hope to orchestrate a soft landing.
Investors are looking to several evolving trends hoping to find news in favor of an assist. We believe an improvement in any of these issues would begin to turn investor sentiment more positive.
China’s Zero-Covid policy: Companies from Adidas to Starbucks have detailed the difficult operating environment within China. While the rest of the world is seeking to treat Covid as endemic, China has doubled down on their zero-Covid policy. This is not only affecting consumer-facing companies such as Adidas, who saw sales in China decline by 35% last quarter. Foxconn is unable to hire new workers amid Covid lockdowns.
Russia’s War: Russia’s ability to waltz into Kyiv, the capital city of Ukraine, was considered fait accompli, until the fighting started. Now the prospects of a prolonged war have become the consensus opinion. This weekend, President Zelensky outlined his conditions for peace talks which include the restoration of pre-invasion borders, membership in the European Union, and Russian accountability.
Employment: The jobs market is tight by any standard, which would make an impending economic recession very unique indeed, since recessions typically occur after many months of weakening employment. Information contained in last Thursday’s labor data detailing both falling participation rates and labor productivity was one of many catalysts for the day’s brutal sell-off. The Fed would love to see a growing labor pool, which will take pressure off rising wages and provide more fodder for continued economic expansion. Corporate America is still finding it very difficult to fill vacant positions, as this weekend’s Wall Street Journal article highlights.
Policy: Monetary policy is not all that matters. Fiscal policy can have a significant effect on sentiment. Many believe the Administration’s focus on renewable energy has had an adverse effect on the supply of traditional energy, exacerbating pressures on energy prices.
Inflation’s Trajectory: We believe the year-over-year change in inflation needs to decline to provide the FOMC some breathing room. The inflation rate is going to remain elevated throughout the year, but it is expected to come down from the peak reading of 8.5% last month. Economists are expecting the year-over-year change in headline CPI, which includes food and energy, to moderate to 8.1% when reported this Wednesday, May 11. More importantly, by the fourth quarter, inflation is expected to fall below 6%. Still very high, but a far cry from 8.5% and moving in the right direction.
In the moment, with the S&P 500 down close to 16% year-to-date, it may feel like everything is going wrong. But at some point in the future, one, then two, and then most of these trends will likely turn positive and begin to bolster investor sentiment. By the time that all clear signal is given, markets will likely have bottomed and be well into a new uptrend. The imperfect science of market timing has routinely disappointed investors who move to the sidelines and await better days to reinvest. Haverford Trust continues to deliver the message of stay invested, stay in touch, and stay focused on your long-term goals.