Ameriprise Financial Inc.
05/02/2022 | Press release | Distributed by Public on 05/03/2022 07:06
Stocks Face the Realities of the Current Environment and Reset Lower
We're sure you assumed this already, but just in case you weren't aware, stocks are off to their worst start in decades. According to Dow Jones Market Data, the roughly 13% decline in the S&P 500® index through the first four months of the year is the Index's worst start since 1939, while the 21% decline in the NASDAQ Composite this year is its weakest start ever.
Unfortunately, rising interest rates, tightening monetary policies, record-high inflation, a war in Ukraine, slowing growth in China amid COVID-zero policies and lingering supply chain constraints have significantly dampened investor sentiment this year. As a result, stock prices have reset lower to the realities of the current environment. Notably, slowing global growth expectations are also increasing recession concerns and contributing to the decline in stock valuations. Bottom line: Investors are less willing to pay up for a future stream of earnings today when the future looks as uncertain as it does at the moment.
To Say April's Performance was Disappointing is an Understatement; Tech Companies Show They're Not Immune to Pressure
When it comes to stock performance in April, there isn't any way to sugar-coat the pain - the month was atrocious. What was supposed to be a turnaround month for stock prices after weak Q1 performance (given April is historically the best performing month of the year for the S&P 500 Index) turned into one of the worst April showings in years. The S&P 500 Index finished last month down 8.8%, its worst April performance in at least 20 years and its first down start to the second quarter in 10 years. In addition, the NASDAQ Composite ended the month down 13.3%, its worst month since October 2008. Communication Services (down 15.8%), Consumer Discretionary (down 13.0%), and Info Tech (down 11.3%) all weighed significantly on the broader U.S. averages in April. And while Consumer Staples (+2.4%), Energy (down 1.6%), and Materials (down 3.5%) helped counter some of the heavier selling pressure across the S&P 500, their limited size/influence on the broader average was unable to reverse the significant declines seen in mega-cap stocks last month.
Outside of the tumble lower in stocks, West Texas Intermediate oil climbed nearly +4.0% to finish at $104.13 per barrel in April. Gold slipped 2.2% to end the month at $1,896.00 per ounce, and the U.S. Dollar Index rose +1.7%.
The final week of April was also one of the busiest weeks of the Q1 earnings season. The five most prominent tech companies on the planet provided a mixed bag of profit results and less-than-exciting outlooks for the current quarter. While mega-cap tech stocks as a whole didn't necessarily overly disappoint in any one area, they offered little, if any, reasons that suggest these companies are immune from the pressures listed above. Frankly, that point was the biggest disappointment for the group last week. If one were hoping these industry giants would step in last week and save the market from its downswing with door-busting profit growth and deliver some brighter outlooks about the quarters ahead, they likely felt very disappointed following the results.
With that said, overall Q1 earnings themes continue to center around economic normalization, a consumer shift from goods to services (particularly in travel), a still healthy demand environment, and company pricing power in the face of inflation pressures. In addition, IT spending/Capex and cloud computing continue to stand out as a tailwind across Tech. However, pressures on supply chains (e.g., earnings commentary from Apple and Microsoft last week) and margins are an ongoing concern. With 55% of Q1'22 S&P 500 company results now in the bag, the blended earnings per share (EPS) growth rate stands at +7.1% year-over-year on sales growth of +12.2%. Although S&P 500 EPS and sales growth are coming in ahead of analyst estimates, investors appear to be discounting the earnings outperformance this time around and focusing instead on the macro-economic drivers that could weaken future profit trends.
U.S. Treasuries Move Higher; Investor's Await this Week's Fed Meeting Where They Expect a 50-Basis Point Rise in Rates
Importantly, the 10-year U.S. Treasury yield moved higher by over 50 basis points in April, an extraordinary backup in rates over such a short period. A number of hawkish commentaries from Federal Reserve members during the month outlining the need to move rates quickly higher to combat inflation pressures rapidly reset the market's expectation for future rate policy. Not surprisingly, the backup in rates last month heavily weighed on stock prices, particularly across high-growth areas, where higher rates erode the value of future earnings.
Speaking of the Federal Reserve, the Fed's FOMC will likely deliver a 50-basis point hike to its Fed funds target rate on Wednesday. As it stands today, the market also expects the Fed to shift its target rate higher by at least 50 basis points at the June and July meetings - marking the most aggressive rate actions in decades. As a result, the Fed funds rate could sit at 2.00% to 2.25% by the end of July and just slightly below the Fed's stated "neutral rate" - where policy is neither accommodative nor restrictive to economic growth. In addition to the focus on rate policy this week, the FOMC is also expected to formally announce the start of its balance sheet runoff. At the March meeting, minutes suggested the Fed was comfortable reducing its nearly $9 trillion balance sheet by $95 billion a month.
Interestingly, while the Fed is readying to hike interest rates at the most aggressive pace in roughly 40 years, Q1'22 U.S. GDP showed the economy contracted by 1.4% quarter over quarter annualized (as reported last week). Although investors quickly looked past the backward-looking data, the decreased private investment inventory (including autos and retail) and lower exports and government spending reflect how quickly the economic landscape has shifted. On a brighter note, resilient domestic demand in Q1 showed the consumer remains on solid footing and willing to spend.
Investors Worry the Fed May be Willing to 'Break' the Economy to Tamp Down Inflation
Yet, here's the rub for investors and why we believe stocks have had such a challenging year so far. Come rain or shine, the Fed is very likely to raise interest rates aggressively, at least through the front half of the year. And because inflation pressures are so elevated today, investors are worried the Fed will need to keep aggressively raising rates in the back half of the year, regardless of the negative consequences it might exert on growth. Said another way, investors fear the Fed may be willing to break the economy (at least a little) to tamp down inflation and return price stability to the market/economy.
While it remains to be seen if the Fed will need to be that aggressive on rate policy, today's stock prices reflect a good portion of this worst-case scenario, in our view. Undoubtedly, investors will be parsing every word of this week's policy statement and follow-up press conference from Fed Chair Powell for clues on the path forward for rate policy. Regardless, stock prices are likely to face added headwinds until a clear picture emerges on exactly how rapidly the Fed will need to raise rates to curb inflation. And since the Fed is still trying to figure out that critical piece of the equation for themselves, this week's policy updates are unlikely to provide any clarity. Thus, investors should brace themselves for another volatile month in May.
During the week, nearly one-third of S&P 500 companies will report their Q1 earnings results, keeping investors busy against this week's Fed meeting. And while April PMI/ISM manufacturing and services reports will be eyed for gleanings into economic activity, along with the March JOLTS report, Friday's April nonfarm payrolls report will capture most of the attention. FactSet estimates call for April payrolls to grow by a healthy +400,000, following the U.S. economy adding +431,000 jobs in March. In addition, the unemployment rate is expected to hold steady at 3.6%.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources. This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.
Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.
A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. The 10-year yield is typically used as a proxy for mortgage rates, and other measures.
West Texas Intermediate (WTI) is a grade of crude oil commonly used as a benchmark for oil prices. WTI is a light grade with low density and sulfur content
The fund's investments may not keep pace with inflation, which may result in losses.
A rise in interest rates may result in a price decline of fixed-income instruments held by the fund, negatively impacting its performance and NAV. Falling rates may result in the fund investing in lower yielding debt instruments, lowering the fund's income and yield. These risks may be heightened for longer maturity and duration securities.
The precious metals market is subject to substantial fluctuations including significant and rapid increases and decreases in value from time to time. Investors must be able to assume the risk of such price fluctuations.
The products of technology companies may be subject to severe competition and rapid obsolescence, and their stocks may be subject to greater price fluctuations.
Past performance is not a guarantee of future results.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
The Standard & Poor's 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees. It is not possible to invest directly in an index.
The NASDAQ composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.
The Dow Jones Industrial Average (DJIA) is an index containing stocks of 30 Large-Cap corporations in the United States. The index is owned and maintained by Dow Jones & Company.
Definitions of individual indices and sectors mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section.
Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.
Unfortunately, rising interest rates, tightening monetary policies, record-high inflation, a war in Ukraine, slowing growth in China amid COVID-zero policies and lingering supply chain constraints have significantly dampened investor sentiment this year. As a result, stock prices have reset lower to the realities of the current environment. Notably, slowing global growth expectations are also increasing recession concerns and contributing to the decline in stock valuations. Bottom line: Investors are less willing to pay up for a future stream of earnings today when the future looks as uncertain as it does at the moment.
To Say April's Performance was Disappointing is an Understatement; Tech Companies Show They're Not Immune to Pressure
When it comes to stock performance in April, there isn't any way to sugar-coat the pain - the month was atrocious. What was supposed to be a turnaround month for stock prices after weak Q1 performance (given April is historically the best performing month of the year for the S&P 500 Index) turned into one of the worst April showings in years. The S&P 500 Index finished last month down 8.8%, its worst April performance in at least 20 years and its first down start to the second quarter in 10 years. In addition, the NASDAQ Composite ended the month down 13.3%, its worst month since October 2008. Communication Services (down 15.8%), Consumer Discretionary (down 13.0%), and Info Tech (down 11.3%) all weighed significantly on the broader U.S. averages in April. And while Consumer Staples (+2.4%), Energy (down 1.6%), and Materials (down 3.5%) helped counter some of the heavier selling pressure across the S&P 500, their limited size/influence on the broader average was unable to reverse the significant declines seen in mega-cap stocks last month.
Outside of the tumble lower in stocks, West Texas Intermediate oil climbed nearly +4.0% to finish at $104.13 per barrel in April. Gold slipped 2.2% to end the month at $1,896.00 per ounce, and the U.S. Dollar Index rose +1.7%.
The final week of April was also one of the busiest weeks of the Q1 earnings season. The five most prominent tech companies on the planet provided a mixed bag of profit results and less-than-exciting outlooks for the current quarter. While mega-cap tech stocks as a whole didn't necessarily overly disappoint in any one area, they offered little, if any, reasons that suggest these companies are immune from the pressures listed above. Frankly, that point was the biggest disappointment for the group last week. If one were hoping these industry giants would step in last week and save the market from its downswing with door-busting profit growth and deliver some brighter outlooks about the quarters ahead, they likely felt very disappointed following the results.
With that said, overall Q1 earnings themes continue to center around economic normalization, a consumer shift from goods to services (particularly in travel), a still healthy demand environment, and company pricing power in the face of inflation pressures. In addition, IT spending/Capex and cloud computing continue to stand out as a tailwind across Tech. However, pressures on supply chains (e.g., earnings commentary from Apple and Microsoft last week) and margins are an ongoing concern. With 55% of Q1'22 S&P 500 company results now in the bag, the blended earnings per share (EPS) growth rate stands at +7.1% year-over-year on sales growth of +12.2%. Although S&P 500 EPS and sales growth are coming in ahead of analyst estimates, investors appear to be discounting the earnings outperformance this time around and focusing instead on the macro-economic drivers that could weaken future profit trends.
U.S. Treasuries Move Higher; Investor's Await this Week's Fed Meeting Where They Expect a 50-Basis Point Rise in Rates
Importantly, the 10-year U.S. Treasury yield moved higher by over 50 basis points in April, an extraordinary backup in rates over such a short period. A number of hawkish commentaries from Federal Reserve members during the month outlining the need to move rates quickly higher to combat inflation pressures rapidly reset the market's expectation for future rate policy. Not surprisingly, the backup in rates last month heavily weighed on stock prices, particularly across high-growth areas, where higher rates erode the value of future earnings.
Speaking of the Federal Reserve, the Fed's FOMC will likely deliver a 50-basis point hike to its Fed funds target rate on Wednesday. As it stands today, the market also expects the Fed to shift its target rate higher by at least 50 basis points at the June and July meetings - marking the most aggressive rate actions in decades. As a result, the Fed funds rate could sit at 2.00% to 2.25% by the end of July and just slightly below the Fed's stated "neutral rate" - where policy is neither accommodative nor restrictive to economic growth. In addition to the focus on rate policy this week, the FOMC is also expected to formally announce the start of its balance sheet runoff. At the March meeting, minutes suggested the Fed was comfortable reducing its nearly $9 trillion balance sheet by $95 billion a month.
Interestingly, while the Fed is readying to hike interest rates at the most aggressive pace in roughly 40 years, Q1'22 U.S. GDP showed the economy contracted by 1.4% quarter over quarter annualized (as reported last week). Although investors quickly looked past the backward-looking data, the decreased private investment inventory (including autos and retail) and lower exports and government spending reflect how quickly the economic landscape has shifted. On a brighter note, resilient domestic demand in Q1 showed the consumer remains on solid footing and willing to spend.
Investors Worry the Fed May be Willing to 'Break' the Economy to Tamp Down Inflation
Yet, here's the rub for investors and why we believe stocks have had such a challenging year so far. Come rain or shine, the Fed is very likely to raise interest rates aggressively, at least through the front half of the year. And because inflation pressures are so elevated today, investors are worried the Fed will need to keep aggressively raising rates in the back half of the year, regardless of the negative consequences it might exert on growth. Said another way, investors fear the Fed may be willing to break the economy (at least a little) to tamp down inflation and return price stability to the market/economy.
While it remains to be seen if the Fed will need to be that aggressive on rate policy, today's stock prices reflect a good portion of this worst-case scenario, in our view. Undoubtedly, investors will be parsing every word of this week's policy statement and follow-up press conference from Fed Chair Powell for clues on the path forward for rate policy. Regardless, stock prices are likely to face added headwinds until a clear picture emerges on exactly how rapidly the Fed will need to raise rates to curb inflation. And since the Fed is still trying to figure out that critical piece of the equation for themselves, this week's policy updates are unlikely to provide any clarity. Thus, investors should brace themselves for another volatile month in May.
During the week, nearly one-third of S&P 500 companies will report their Q1 earnings results, keeping investors busy against this week's Fed meeting. And while April PMI/ISM manufacturing and services reports will be eyed for gleanings into economic activity, along with the March JOLTS report, Friday's April nonfarm payrolls report will capture most of the attention. FactSet estimates call for April payrolls to grow by a healthy +400,000, following the U.S. economy adding +431,000 jobs in March. In addition, the unemployment rate is expected to hold steady at 3.6%.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources. This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.
Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.
A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. The 10-year yield is typically used as a proxy for mortgage rates, and other measures.
West Texas Intermediate (WTI) is a grade of crude oil commonly used as a benchmark for oil prices. WTI is a light grade with low density and sulfur content
The fund's investments may not keep pace with inflation, which may result in losses.
A rise in interest rates may result in a price decline of fixed-income instruments held by the fund, negatively impacting its performance and NAV. Falling rates may result in the fund investing in lower yielding debt instruments, lowering the fund's income and yield. These risks may be heightened for longer maturity and duration securities.
The precious metals market is subject to substantial fluctuations including significant and rapid increases and decreases in value from time to time. Investors must be able to assume the risk of such price fluctuations.
The products of technology companies may be subject to severe competition and rapid obsolescence, and their stocks may be subject to greater price fluctuations.
Past performance is not a guarantee of future results.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
The Standard & Poor's 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees. It is not possible to invest directly in an index.
The NASDAQ composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.
The Dow Jones Industrial Average (DJIA) is an index containing stocks of 30 Large-Cap corporations in the United States. The index is owned and maintained by Dow Jones & Company.
Definitions of individual indices and sectors mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section.
Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.