Weekly Market Update 5/9/2022
While the U.S. economy contracted by an annualized rate of 1.4% in the first quarter, some other economic indicators have been positive. The headline negative number was a stark contrast to the 6.9% increase in gross domestic product recorded in the fourth quarter and worse than the consensus expectation calling for growth of around 1.0%. On the other hand, consumer demand has stayed strong, so far; unemployment is low; and much of the contraction was attributable to continued supply chain difficulties.
We don’t think a recession is imminent. The first-quarter retreat was primarily the result of a drawdown in inventory built up last fall. Retailers often make purchases in advance, to prepare for things like the holiday shopping season. The worries about supply-chain delays likely further exacerbated the stocking up on materials by companies. We expect the reversal of this trend in the current quarter to drive a recovery in GDP growth.
The monetary policy tightening course the Federal Reserve takes in its attempt to combat inflation will be highly scrutinized. The central bank must avoid pumping on the brakes too hard or risk stagflation, a period when slow economic growth and joblessness coincide with ris- ing inflation. Investors should note that April employment figures from the Labor Department were to be released after this report went to press.
Meantime, first-quarter earnings season has produced mixed results. While most companies have beaten expectations, the ratcheting down of near-term prognostications, mostly on inflation concerns, is worrisome. And in instances where companies with high stock-price valuations disappoint, Wall Street has not been kind. The combination of uneven quarterly data and a more-hawkish Federal Reserve have provided little support for equities.
Conclusion: Volatility remains elevated on Wall Street, which is so far making for a difficult year for both equity and bond holders. As sentiment is now shakier, greater care in equity selection appears warranted, and we think a well-diversified portfolio of high-quality stocks may be the best way to minimize possible downside risk.