Weekly Market Update 5/2/2022
Stock market volatility picked up during the latter portion of April. This was prompted, in large part, by hawkish monetary policy comments from Federal Reserve Chairman Jerome Powell in his final speech before the central bank’s early May Federal Open Market Committee (FOMC) meeting. Investors should note the Federal Reserve was scheduled to hold that FOMC meeting shortly after we went to press.
The central bank’s more-restrictive monetary policy stance, along with stubbornly high inflation, are putting upward pressure on Treasury market yields. The rate on the benchmark 10-year Treasury note approached the 3.00% level in late April. The higher borrowing costs make it more expensive for companies to invest in their operations. In general, the ongoing first-quarter earnings season (more below), along with the recent initial public offering (IPO) market drought, may be an indication of some increasing pessimism in Corporate America. An IPO occurs when a privately owned company lists shares in an effort to raise capital to finance and/or expand its business.
First-quarter earnings season has not provided much support for stocks. For the most part, March-period results have been solid, but near-term outlooks are a bit cloudier. To date, several companies have ratcheted down earnings predictions for the remainder of this year, with most citing elevated operating costs due to inflationary pressures not seen in four decades as the main factor.
The high-flying technology names that were big winners during the pandemic have fallen out of favor. This is not overly surprising, as many of these less profitable companies are valued on future earnings potential. In a rising interest-rate environment, those potential gains, when discounted back to present value, look less attractive.
Conclusion: This year has thus far been a challenging one for investors of all stripes. The drop in Treasury market prices, and the resultant increase in yields, have pressured both equity and bond prices, making for a very volatile trading market. That said, we recommend that investors, especially those with a longer-term timeline, not panic and stay the course. In fact, the CBOE Volatility Index (or VIX) recently traded at a level that would suggest the market is oversold and there may be some buying opportunities at hand.