Weekly Market Update 4/25/2022
First-quarter earnings season did not get off to a rousing start. In fact, the major U.S. banks, including JPMorgan Chase and Goldman Sachs, reported sharp year-over-year declines in earnings. The primary culprits behind the setbacks were higher operating expenses and generally weaker asset management and investment banking activities.
The banking results may be a harbinger of things to come for the U.S. economy. The aforementioned weakening banking activities relate directly to the health of the economy. The declines may suggest that Corporate America is feeling hesitant about the future.
Stubbornly high inflation is weighing on the U.S. consumer. Retail sales figures for March showed elevated prices for food and energy commodities (natural gas recently surged to a 13-year high), which significantly increases the monthly necessities bills for U.S. households. This may force consumers to defer purchases of discretionary items, a trend that may well reduce GDP growth during the spring and summer months.
All signs suggest the Federal Reserve is behind the curve in its attempt to combat inflation. This will likely result in more-restrictive monetary policies over the balance of 2022 and next year, including a few half-percentage-point hikes to the benchmark federal funds rate, to try to rein in surging prices at both the producer and consumer levels.
The next 12 to 18 months may prove to be a slippery slope for the Federal Reserve to navigate. With signs suggesting that economic growth is already moderating, the central bank must avoid pumping the monetary brakes too hard, which would risk exacerbating the slowdown and could even result in stagflation. That is a period of high inflation and slowing economic growth, accompanied by rising unemployment. That said, the U.S. labor market has proven resilient thus far in 2022 with an estimated 1.685 million jobs created during the first calendar quarter.
Conclusion: It remains a challenging investment environment right now, given the more-restrictive central bank and rising fixed-income yields. Still, with the Fed looking to aggressively hike interest rates and sell a portion of its asset holdings—both of which are likely to put added downward pressure on bonds—we believe a well-rounded portfolio of high-quality equities remains the best near-term investment option.