Market Sell-Off Amid Headwinds
The US stock market sank in April with the Nasdaq falling 13.0% ‒ its worst monthly performance since October 2008. The S&P 500 lost 8.8% ‒ that index’s worst month since March 2020. Similarly, the Dow Jones Industrial Average was down 4.9% on the month. The slowing economy, a hawkish US Central Bank, surging inflation, ongoing Russia-Ukraine War, China Covid lockdown, and mixed first-quarter earnings reports have all contributed to the market's sell-off.
Markets are being weighed down by lingering fears over persistent inflation and concerns over whether tighter monetary policies might derail the economy. Energy and other commodities continued to drive robust inflation data. On a year-ago basis, the headline March CPI was up 8.5%, the strongest since the early 1980s. Meanwhile, core CPI softened more than expected and was up 6.5% on a year-ago basis in March, driven in part by the sharp price decline in used cars. However, we believe it is too early to draw a conclusion about moderating core inflation and believe that the risks remain to the upside, driven partially by potential supply issues derived from the Russia-Ukraine conflict.
We expect the Fed to remain hawkish given accelerating inflation pressures in energy and food, with risks that these pressures could spill over into higher inflation expectations. Speaking at an IMF-hosted event, Fed Chair Jerome Powell said that a 50-basis points hike could be on the table at the May policy meeting where he stated that, “it is appropriate…to be moving a little more quickly.” Investors are pricing in over 240 basis points of tightening for the rest of this year.
Investors were also worried about lockdowns in major cities in China such as Shanghai and Beijing, with fears those might exacerbate the already extensive disruptions to global supply chains and intensify inflationary pressures. It looks like developments over the past few weeks suggest a moderate disruption (versus the major disruption in early 2020). The latest high-frequency data also indicated some progress with new cases beginning to decrease, the portion of high to medium-risk cities declining, and manufacturers in Shanghai gradually resuming production.
April also demonstrated some solid overall earnings so far this season, but disappointing reports from mega-cap companies such as Netflix and Amazon led to plunging share prices. About 80% of S&P 500 companies beat earnings estimates, with about 55% of companies reporting. In the aggregate, companies are reporting earnings that are 3.4% above estimates, which is well below the five-year average of 8.9%. At the same time, diverging earnings from mega-cap companies fueled wild swings in the market. On the last trading day of the month, Amazon sunk about 14% after the e-commerce giant reported a surprise loss and issued weak revenue guidance for the second quarter.
Some recent data showed evidence of resilient economic activity with strong March indicators for industrial production and housing starts complemented by an unexpected improvement in April consumer sentiment. However, the most significant data surprise may have been the advance estimate showing that GDP fell 1.4% in the first quarter. Trade was a substantial drag on growth (net export down by 3.2%), with the Russian invasion of Ukraine contributing in part to the massive pain. While consumer spending (up 2.7%) and business investment (up 7.3%) are still solid, we believe GDP growth will be slower this year than last year with a slew of headwinds around tightening monetary policies and geopolitical risks.
By the Numbers (Year-to-Date)*
U.S. Equities (S&P 500 Index) | -13.0%
International Equities (MSCI ACWI ex-U.S.) | -11.4%
U.S. Bonds (Barclays U.S. Aggregate Bond Index) | -9.5%
Global Bonds (JP Morgan Global Aggregate Bond Index) | -11.3%
The NorthCoast Navigator is a market "barometer" displaying NorthCoast's current U.S. equity outlook. This aggregate metric is determined by multiple data points across four broad market-moving dimensions: Technical, Sentiment, Macroeconomic, and Valuation. The daily result determines equity exposure in our tactical strategies.
As of 4/30/2022. Data provided by Bloomberg, NorthCoast Asset Management.
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Valuation The S&P 500 posted a monthly loss of 8.8%, with valuations for equity improving but remaining negative. P/E: decreased from 23.3 at the end of March to 21.2 at the end of April; Forward P/E: fell from 20.1 at the end of March to 18.1 at the end of April. Inflation-adjusted valuation metrics continued to be negative with inflation rising.
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Sentiment The U.S. manufacturing condition remained solid, with the ISM manufacturing index staying well above the neutral level of 50. However, the index fell to 57.1 in March from 58.6 in February, with lingering supply-chain issues and uncertainty around the geopolitical conflict. According to the University of Michigan survey, U.S. consumer confidence rebounded in April to 65.2 from 59.4 in March, led by rising expectations. Nonetheless, the index remains relatively low with high gasoline prices, surging inflation, and a deteriorating stock market. Homebuilder confidence slipped 2 points to 77 in April. Higher interest rates reduced buyer affordability, and rising builder costs continued to push down the sentiment. |
Technical Technical indicators were positive as the VIX “fear index” and reversal indicator outweighed momentum indicators. The S&P 500 was 8% below its 200-day moving average, 8% below the 100-day average, and 6% below the 50-day average. VIX: spiked to 33.4 at the end of April compared with20.6 at the end of March. Volatility resurged in April amid concerns over tighter Fed’s policy, persistently high inflation pressures, geopolitical risks and Covid lockdowns in China.
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Macroeconomic The labor market remained tight as the pandemic continues to recede, with payroll employment increasing by 431,000. Inflation remained elevated with the headline and core CPI up 8.5% and 6.5% on a year-ago basis, respectively. Meanwhile, the Producer Price Index for final demand rose more than anticipated in March, increasing 1.4%. Retail sales appeared healthy (up 0.5%) but remained weak in March with rising prices largely attributing to the gains. On the other hand, industrial production expanded 0.9% in March, a larger gain than consensus estimates.
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1 Source: Bloomberg, NorthCoast Asset Management. NorthCoast Asset Management is a d/b/a of, and investment advisory services are offered through, Connectus Wealth, LLC, an investment adviser registered with the United States Securities and Exchange Commission (SEC). Registration with the SEC or any state securities authority does not imply a certain level of skill or training. More information about Connectus can be found at www.connectuswealth.com. The information contained herein has been prepared by NorthCoast Asset Management (“NorthCoast”) on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. NorthCoast has not sought to independently verify information obtained from public and third-party sources and makes no representations or warranties as to accuracy, completeness, or reliability of such information. All opinions and views constitute judgments as of the date of writing without regard to the date on which the reader may receive or access the information and are subject to change at any time without notice and with no obligation to update. This material is for informational and illustrative purposes only and is intended solely for the information of those to whom it is distributed by NorthCoast. No part of this material may be reproduced or retransmitted in any manner without the prior written permission of NorthCoast. NorthCoast does not represent, warrant or guarantee that this information is suitable for any investment purpose, and it should not be used as a basis for investment decisions. © 2022 NorthCoast Asset Management. PAST PERFORMANCE DOES NOT GUARANTEE OR INDICATE FUTURE RESULTS. This material should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or investment products or to adopt any investment strategy. The reader should not assume that any investments in companies, securities, sectors, strategies and/or markets identified or described herein were or will be profitable and no representation is made that any investor will or is likely to achieve results comparable to those shown or will make any profit or will be able to avoid incurring substantial losses. Performance differences for certain investors may occur due to various factors, including timing of investment. Investment return will fluctuate and may be volatile, especially over short time horizons. INVESTING ENTAILS RISKS, INCLUDING POSSIBLE LOSS OF SOME OR ALL OF AN INVESTMENT. The investment views and market opinions/analyses expressed herein may not reflect those of NorthCoast as a whole and different views may be expressed based on different investment styles, objectives, views, or philosophies. To the extent that these materials contain statements about the future, such statements are forward looking and subject to a number of risks and uncertainties. |