Blog

Markets in December navigated several crosscurrents including weakening trends across the global economy, a Chinese exit from its zero-Covid public health policy, the BoJ abandoning its yield curve control policy, and a continuation of hawkish global central bank policies. Decelerating inflation trends remained evident throughout the month with wage inflation and tight labor markets both key concerns for policy makers.    

While Q4 was positive, U.S. equity markets faltered in December, giving back a chunk of October/November gains while international markets managed to post slight gains with China, Emerging Europe, Hong Kong, Western Europe, and Japan all in the black for the month.  The S&P 500 -5.76% return in December (-18.1% for 2022) placed it among six other months in 2022 where the S&P 500 declined by at least 2.5%, a return pattern typically reserved for recessionary periods and ensured its worst return since 2008. The equal weight S&P 500 finished the month at -4.76% and 2022 at -11.95%.

Bond markets in December were slightly negative with the 10yr UST yield edging slightly higher to close up 0.20% at 3.88% and the 2yr UST staying relatively flat to close at 4.41%.  High yield credit spreads widened slightly from 4.55% to 4.91% while investment grade spreads were largely unchanged.  The Barclays Aggregate lost 0.45% for December to close the year down a record 13%.

Market Anecdotes

• 2022 left the S&P down 18%, due primarily to multiple compression, closing with a P/E multiple of 16.7x, a valuation almost exactly at the 25-year average.
• A painful look back at 2022 shows the Barclays Aggregate Index down 13%, the worst return on record by a factor of 4x, a significant contributing factor to the third worst outcome for a 60/40 portfolio since 1950.
• Stocks in the Russell 1000 saw their market caps fall by close to $11tn in 2022. The tech sector got hammered the most due to rising interest rates, losing close to $4.4tn with Consumer Discretionary slotting in 2nd with $2.6tn of market cap wiped out.
• With every year end comes an annual data dump of calendar year market history lessons beginning with Bloomberg pointing out that the S&P 500 has fallen two straight years only four times since 1928 (WWII, Great Depression, dot-com bubble, 1970’s oil crisis).
• A strong consumer underpins most bullish/constructive views looking into 2023 – a view bolstered by consumer balance sheets, savings, debt service, and the healthy job market. 
• With ISM Services and Manufacturing Indexes both falling below 50, a reminder of the predictive nature and efficacy warrants consideration.
• With core inflation ex-shelter being highlighted by the Fed as a key focus point with monetary policy implications, the trend is clear but importantly, the terminal level remains very unclear.
• Real personal disposable income grew in the back half of 2022 after declining for five consecutive quarters – a strong potential bullish tailwind for 2023.
• A second consecutive cooling U.S. CPI reading came with fairly broad-based price deceleration with energy, used vehicles, airfares, and medical care services declining and the pace of shelter inflation beginning to slow down.
• Arbor Data Science charted the annual release of Google search trends, revealing a surprising absence of economic or financial market related searches. Not surprisingly, 2022 trends were dominated by searches for ‘shortages’ of various products including sriracha, baby formula, tampons, diesel, and adderall.

Economic Release Highlights

• The December jobs report came in stronger than consensus with higher job creation (223,000 vs 200,000) and lower headline unemployment (3.5% vs 3.7%). Labor force participation ticked higher from 62.2% to 62.3%.
• Average hourly earnings growth in December came in below consensus for both MoM (0.3% vs 0.4%) and YoY (4.6% vs 5.0%) readings.
• The JOLT survey registered 10.458mm job openings, higher than the consensus spot forecast of 10.1mm and above the high end of estimate range of 10.00mm-10.33mm.
• The ISM Manufacturing Index came in at 48.4, a second consecutive decline but slightly higher than consensus forecast of 48.1 and within the estimated range of 47.5 – 49.0. The ISM Services Index surprisingly came in well below consensus estimate (49.6 vs 55.0) and dipped into contraction territory.
• U.S. PMI’s (C, M, S) of 44.6, 46.2, 44.4 came in below consensus across all three measures.  Japan’s PMIs of 50.0, 48.8, 51.7 came in above consensus. Eurozone PMIs of 48.8, 47.8, 49.1 were also higher than forecast.
• November’s J.P. Morgan Global Manufacturing PMI registered 48.6, down slightly from the prior month reading of 48.8.
• Retail Sales were softer than forecasted (-0.6% vs -0.2%) but within the consensus range of -1.1% to 0.4%. YoY retail sales growth is up 6.5%.
• The Case-Shiller Home Price Index registered -0.5% MoM and +8.6% YoY price changes, both ahead of the spot forecast and within the consensus range respectively. Pending Home Sales fell 4%, below the spot forecast of -0.5% and the low end of the range.
• The December Housing Market Index came in at 31 vs expectations of 34 and below consensus range of 32-35. Housing Starts (1.427mm) and Permits (1.342mm) came in above and below their forecasts respectively. Existing Home Sales of 4.09mm was slightly below consensus but within the consensus range, down 7.7%MoM and down 35.4% YoY.
• Industrial Production fell 0.2%, on the low end of the range and spot forecast of 0.1%.
• NFIB Small Business Optimism Index registered 91.9 vs consensus estimate of 90.8.
• Consumer Confidence reading for December came in well above the point forecast (108.3 vs 101.0) and consensus range of 98.0-103.0.
• The third and final estimate of Q3 U.S. GDP was revised higher from 2.9% to 3.2% (A/R) with Personal Consumption revised up from 1.7% to 2.3% (A/R).

Key market narratives in August included continued deceleration in economic growth, the completion of a strong second quarter earnings season, and a Jackson Hole symposium where central bankers pledged to maintain their hawkish course to tame inflation.

The month was a tale of two halves across global equities with a strong rally in the first two weeks and a sharp reversal in the last two weeks as the Fed made clear its commitment to bringing inflation back down to target levels.  This was the third time this year the S&P 500 was both up and down 4% in the same month.  Growth underperformed value and defensives (consumer staples/utilities) and energy were relative winners.  For the month, U.S. markets finished down 4% and non-U.S. developed markets were down 4.7% but emerging markets managed to post a 0.4% gain driven by the BRICs (ex-Russia which isn’t really trading).  Europe (-6.4%) underperformed as Russia stepped up pressure on energy deliveries.  Commodity markets were relatively flat for the month with oil (-7.8%), gasoline (-25.3%), and metals (-2.7%) losing ground but natural gas (+11%) and grains (+3.57%) rising.  The USD was strong against all major currencies, trading near parity with the Euro by month end.

Unfortunately, stocks received no cover from the bond market as U.S. interest rates moved persistently higher through the month pressuring equity markets and foreign currencies.  The Barclays Aggregate (-2.8%), High Yield (-2.3%), and Global (-4.3%) all lost substantial ground resulting in the worst bond market return through August on record.  Two-year UST yields surged 60bps during the month, bringing the YTD total to nearly +300bps (a magnitude seen only three times since 1977).

Overall economic activity in August continued to slow with PMIs falling into contractionary territory and a sharp deceleration in the housing market, but the robust U.S. labor market and healthy consumer spending made for a pretty mixed picture.  Several inflation data points highlighted the potential beginning of a slowing trend including the July CPI report, falling commodity prices, and multiple survey-based metrics.  That said, the odds of a Goldilocks outcome for the US economy seemed to take a hit with FOMC and ECB indicating they are willing to induce some ‘pain’, to tame inflation.  

Geopolitical risks including Russian/Ukraine, China/Taiwan, and a tenuous Iranian nuclear deal remained with no clear-cut inflection points yet visible.

Market Anecdotes

• Fundamentals surrounding earnings and profit margins reinforce a note of caution with respect to the forward outlook and trends respectively.
• A look at global central bank policy rates illustrates how synchronized the world is (tightening) but also how deeply negative central bank rates still are considering inflation (real policy rates).
• Slowing global growth and the policy response to inflation have investors on edge. Percolating evidence of supply side and pandemic related disinflation may offer some glimmers of hope.
• The dismal year of the 60/40 portfolio continues to deliver with both stock and bond markets both sitting over 10% in the red YTD and very little company from a misery loves company perspective.
• A look at narrow market leadership and average correlations among stocks within the S&P 500 illustrate some of the primary headwinds for active managers in place since the GFC and era of central bank intervention policies.
• The pain of rising interest rates is clear and translates to rising mortgage rates (30yr (5.66%), 15yr (4.98%), and 5/1 adjustable (4.51%)) exerting pressure on the housing market. Rates are also pressuring P/E multiples which sit near the midpoint of the range over the last ten years.
• Softness in the housing market from exuberant levels of late 2021 to early 2022 is apparent. Bianco Research examined several alternative measures also illustrative of both pricing trends and the technical backdrop.
• With midterms approaching, political analysts are stepping up their forecasts with projections of a divided Congress and a plethora of Trump 2.0 storylines.  Key takeaways are limited legislative pathways translating to ample executive agency and debt limit/shutdown debates.
• The EU energy crisis with December and February sanctions looming has EU bound Russian gas being flared, the EU buying gas at any price, and a G7 agreement of a price cap on Russian oil.
• Housing market dynamics, weak domestic demand, a contraction in exports, and persistent zero covid public health policies are seemingly limiting the modest stimulus measures undertaken in China, leaving strategists with an underwhelming outlook for Chinese equity markets.

Economic Release Highlights

• PCE Inflation MoM of headline (-0.1% vs 0.1%) and core (0.1% vs 0.3%) and YoY headline (6.3% vs 6.3%) and core (4.6% vs 4.7%) both came in slightly below estimates.
• Personal Income (0.2% vs 0.6%) and Personal Consumption Expenditures (0.1% vs 0.4%) both came in softer than expected.
• Retail Sales (0.0% vs 0.1%) were flat but the ex/vehicles (0.4% vs -0.1%) and ex/vehicles & gas (0.7% vs 0.3%) both handily exceeded expectations.
• The August jobs report revealed 315,000 new jobs, just beyond the consensus forecast of 293,000 but the unemployment rate ticked 0.02% higher to 3.7%.  The labor market participation also increased 0.02% to 62.4%.
• The JOLT survey showed 11.239mm job openings, well more than the consensus 10.4mm and above the high end of the range.
• Consumer Confidence in August climbed to 103.2, ahead of the consensus estimate of 97.4 and above the high end of the range.
• UofM Consumer Sentiment for August beat consensus expectations, registering 55.1 versus forecasts for 52.2.
• NFIB Small Business Optimism Index came in just above consensus at 89.9 versus forecast of 89.2 and up slightly over the prior month.
• ISM Manufacturing Index for August stayed at 52.8, just above the spot consensus forecast of 52.0.
• August ISM Services Index came in at 56.9 versus consensus forecast of 55.4, toward the higher end of consensus range of 53.5 to 57.0.
• U.S. PMIs (C, M, S) continued to contract in August with readings of 45.0, 51.3, 44.1, all missing and coming in at or below the lowest end of consensus range.
• Eurozone PMIs (C, M, S) of 49.2, 49.7, 50.2 all came in slightly higher than consensus while Japan’s readings of 48.9, 51.0, 49.2 moved slightly lower versus the prior month. 
• The Global Manufacturing PMI declined further in August, falling to a 26-month low of 50.3, down from 51.1 in July.
• The Case-Shiller Home Price Index rose 0.4%, less than the 1.1% consensus forecast.
• New Home Sales (511k) came in under consensus of 575k and below the low end of the range of forecasts. Pending Home Sales of -1% was slightly better than -2.5% forecasted.
• Existing Home Sales of 4.81mm was below the 4.85mm forecast and growth rates of -5.9% MoM and -20.2% YoY both declined notably versus prior month levels.
• August Housing Market Index collapsed in July to 49, far below the spot forecast of 55 and predicted range (53-58) for the month. 

For the month of July

Market narratives during July included relatively strong second quarter earnings reports, decelerating global economic growth, and central bank resolve with a backdrop of persistently high inflation which began to show signs of moderating toward month end.  The FOMC (75bps) and ECB (50bps) both delivered expected rate hikes during the month as they attempt to temper inflation without crippling their respective economies.  This was the ECB’s first rate hike since 2011.  Wall Street’s focus on growth with the Fed’s focus on inflation and employment are clearly at odds with one another.  July’s economic calendar painted a very mixed picture with slowing yet still expanding economic activity, a challenged housing market, and inflation pressures well beyond the comfort level of the FOMC offset by a robust job market, signs that peak inflation may be behind us, and global equities and bonds turning in their best month of the year.  All the while, geopolitical risk remains front and center with tragic conflict in Russia/Ukraine alongside percolating troubles in the Middle East and China/Taiwan. 

Financial markets rebounded sharply in July from June’s carnage with stock and bond markets both posting strong results.  U.S. stocks (+9.3%) outperformed their global peers (+3.4%) as falling bond yields helped the U.S. growth/tech oriented domestic market. Both Europe and Japan rose over 5% while emerging markets were flat given another difficult month for Chinese markets (-9.5%) due to a continuation of their zero-Covid policy domestically.  Interest rates fell across the curve with a more pronounced move lower in longer maturities while high yield credit spreads narrowed from 5.87% to 4.83% on the month.  Commodity markets were generally higher with energy up 12.22% (despite WTI oil falling 4.18%) thanks to natural gas moving 52% higher in July.  The safe haven USD weakened slightly during July where we saw the Euro briefly touch parity with the USD and the Yen fall to its weakest level since 1998.

Exactly how much bad news (recession, runaway inflation, etc..) was priced in toward the end of June?  It seems July worked to reprice some of those sentiments.  While global economies are slowing materially, a recession in the U.S. is not yet a foregone conclusion.  Positive surprises on inflation can catalyze a rebound in risk assets but supply side inflation pressures (commodities, supply chain, elevated goods consumption) receding does not necessarily mean inflation well beyond the FOMC comfort level won’t persist for some time to come. 

Market Anecdotes

• Over 800 companies have reported 2Q earnings thus far with decent beat rates and underwhelming beat magnitudes.  Upward guidance has fallen from 20% to 10% over the past few quarters but 10% is still an impressive number.  S&P 500 earnings and revenue growth sit at 6.7% and 13.6%.
• July’s FOMC meeting delivered the expected 75bps rate hike, bringing rates from zero to the Fed median projection of “neutral” (2.25%-2.5%) in four months (ala Volker). The Fed also abandoned forward guidance and highlighted attempts to balance growth and inflation risks.
• The Bank of Canada hiked rates by 100bps and the RBNZ by 50bps to take both reference rates to 2.5%. The ECB notched a 50bps rate hike to combat inflationary concerns.
• Market reaction to the overwhelmingly robust July jobs report was categorized as ‘good news is bad news’ with futures pricing in a more aggressive tightening path and a higher terminal rate.
• July’s CPI read painted a more dovish picture, however, with future market expectations pricing in greater odds of 50bps rate hike as opposed to 75bps at September’s meeting.
• The tug of war between Wall Street (growth focus) and the Fed (inflation focus) will be the key determinant for risk assets and the economy looking forward.
• Global inflation has yet to abate but falling commodity prices (including oil) are providing some hope.  Oil’s notable break to the downside is clear but Russia/Ukraine, China zero Covid, and global growth combined translate to extreme levels of uncertainty.
• Gas prices have fallen for over 50 consecutive days and $1.00 from the peak, now around $4.11 per gallon with some areas of the country actually seeing a two handle on a gallon
• With a second straight quarter of negative GDP (-0.9% for Q2), the BCA bull contingency noted the strong possibility of 2Q GDP being revised to positive growth in addition to noting Q1 real GDI increased 1.8% in the first quarter.
• Interesting anecdote on the impact of P/E multiple compression on the Russell indices is that the R1000 Value now includes prior growthy names such as Netflix and Facebook while the R1000 Growth included Coca Cola and Procter & Gamble.
• Bespoke notes the 25 largest stocks in the Russell 3000 (<1% of the index) have added $2.3tn in market cap since the 6/16 low.  The remaining 99%+ names in the index have added roughly $3.1 trillion. The 5 largest have added $1.69 trillion in market cap since 6/16.

Economic Release Highlights

• July CPI rose less than expected with Headline CPI (a,e)  coming in at 8.5% vs 8.7% YoY and 0.0% vs 0.2% MoM. Core CPI (a,e) came in at 5.9% vs 6.1% YoY and 0.3% vs 0.5% MoM.
• The Personal Income & Outlays report revealed PCE inflation near consensus with headline of 1.0% vs 0.9% MoM and 6.8% vs 6.7% YoY and core of 0.6% vs 0.5% MoM and 4.8% vs 4.7% YoY. Personal income (0.6% vs 0.5%) and personal consumption expenditures (1.1% vs 0.9%) both increased more than expected.
• Retail Sales bounced back from the prior month’s disappointing result with headline (1%a vs 0.9%e), ex-vehicles (1%a vs 0.6%e), and ex-vehicles & gas (0.7%a vs -0.2%e).
• U.S. 2Q GDP registered -0.9% for the second quarter, within the consensus estimate range of -1.1% to 1.5%.
•  July’s Employment Situation reported new jobs of 528,000 far exceeding consensus of 250,000, taking the unemployment rate down one tick to 3.5%.
• Labor market participation fell one tick to 62.1% and average hourly earnings came in higher than consensus with growth rates MoM (0.5% vs 0.3%) and YoY (5.2% vs 5.0%).
• The JOLT Survey revealed 10.698mm job openings, fewer than the 11.0mm forecasted and well below the 11.303mm openings in May.
• The Conference Board’s Consumer Confidence Index for July came in near consensus at 95.7 versus 96.8.
• UofM Consumer Sentiment for July of 51.1 came in slightly higher than the forecast of 50.0 but was generally within consensus range of 48.4-53.0.
• July’s ISM Manufacturing Index beat expectations of 52.2 with a reading of 52.8. ISM Services Index came in well above consensus of 53.0 at 56.7.
• U.S. PMIs (C, M, S) of 55.1, 59.7, 54.7 saw manufacturing readings surprise on the upside but services coming in under consensus. 
• Eurozone and Japan PMIs (C, M, S) of (49.8, 49.8, 51.2) and (50.2, 52.1, 50.3) respectively saw Europe officially dip into contraction on two fronts and second derivative slowing from Japan.
• New Home Sales of 590K were below consensus forecast of 664K and range of 620k-680k. Pending Home Sales (-8.6% vs -1.0%) missed notably to the downside.
• The Case-Shiller Home Price Index was up 1.3% over the prior month, below both the forecast of 1.6% and range of 1.5%-2.1%.
• Existing Home Sales of 5.12M came in under consensus estimate of 5.395M and under the low-end consensus range of 5.15M to 5.5M.
• The Housing Market Index again fell short of consensus expectations, registering 55 versus consensus forecast of 66.
• NFIB Small Business Optimism Index tumbled to 89.5 in June, falling short of the 92.9 consensus estimate.

April was the cruelest month of the year thus far with all major global financial assets performing poorly
with the exception of the U.S. dollar. Monetary policy, inflation, supply chain disruptions, Chinese zero
tolerance Covid policy, and the war in Ukraine combined to push rates and commodities sharply higher
and global equities lower. After posting one of the only positive numbers in March, U.S. equity markets
lost 8.7% in April, one of the worst returning equity markets globally with technology stocks leading the
way down as evidenced by the NASDAQ marking its worst monthly decline since the global financial
crisis in 2008. Chinese equity markets (-4.1%) saw a late month rally with expectations of easing both
monetary policy and technology regulation while Europe was a top relative performer losing only 0.75%
in local currency terms but -5.75% after adjusting for the strong U.S. dollar.
Fixed income markets posted a fifth consecutive month of losses with both U.S. bonds (-3.75%) and non-U.S. bonds (-6.99%) losing substantial ground. Interest rates crept higher on monetary policy (Fed
among others) and inflation concerns with inflation data sticking at multi-decade highs. High yield credit
spreads moved methodically higher through the month, from 3.43% to 3.97% but remain relatively low
in a longer-term context.
Commodity markets enjoyed another strong month of gains mostly through the energy and agricultural
complexes while industrial and precious metals both lost ground in April. The Russia-Ukraine war has
sent energy and agricultural prices soaring this year with oil (+44%) and natural gas (+103%) as well as
corn, wheat, soybeans up 27%-38%.
The labor market, economic activity, and corporate earnings all look relatively encouraging with
elevated inflation and its uncertain path forward posing questions to any bullish thesis. Unemployment
of 3.6%, service and manufacturing surveys solidly in expansionary territory, and U.S. earnings growth of approximately 9% all suggest relatively healthy underlying fundamentals.

Market Anecdotes

• FactSet noted that, through April, 55% of S&P 500 companies have reported earnings with beats and margins of 80% and 3.4% respectively. Blended earnings growth is at 7.1%. Revenue beats and margins of 72% and 2.2% alongside revenue growth of 12.2% remain relatively encouraging.
• The yield on the 10-year Treasury note posted its biggest monthly gain in 13 years. Global bonds have lost 11.30% in the first four months of the year and 5.48% just in April resulting in the worst monthly and YTD return in history. Bloomberg’s U.S. Aggregate Index posted worse monthly returns on only two occasions, October 1979 and February 1980 during the last bout of runaway inflation in the U.S.
• Stocks are also off to their worst start on record. The S&P 500 is down 12.9% so far this year, marking the index’s worst YTD return in almost 95 years of history.
• The Nasdaq dropped 13.2% just in the month of April; its worst showing since October 2008. The index is down 21% in 2022; its worst start to a year on record. The FANMAG complex lost over $1 trillion in market cap just in April.
• Commodities continued to power higher in April. The Bloomberg Commodities Index returned 30.75% in the first four months of the year, far outpacing the returns at a similar point of any other year on record.
• For the month, WTI rallied 4.4% and finished the month at $104.7 per barrel. Factors include lack of Russian supply to the West, Saudis holding back supply, and US ramp up. April’s rally marks a five-month streak of higher prices which is second on record only to the eight-month rally of late 2010/early 2011.
• The French election victory of Emmanuel Macron over Marine Le Pen gave markets a dose of familiarity and certainty with respect to France’s role within the EU and globally.
• Fed comments have firmed up market expectations of the pace and scale of rate hikes with 325bps currently priced in over the next twelve months. In response, the Bloomberg Aggregate bond index (YTD) has experienced its worst return in history.
• April data releases from China reveal a mixed bag of moderate growth countered by CoVid- 19 related drag on economic activity at a time with depressed private sector demand and weak housing market. Shipping congestion in Chinese ports is also clearly on the rise.
• A weak Yen in 2022 hasn’t translated to strong performance by Japanese exporters as evidenced by Japan’s equity market being down double-digits. Several forces factoring in with a rebound/reversion opportunity seemingly still in wait.

Economic Release Highlights

• April’s Employment Report showed payrolls increasing 428,000, an unemployment rate of 3.6%, a decrease in labor market participation to 62.2%, and YoY hourly earnings increase of 5.5%.
• Headline and core CPI registered 8.5% and 6.5% respectively with MoM increases of 1.5% and 0.3%, all relatively in-line with consensus expectations.
• Headline and core PPI registered 11.2% and 9.2% respectively, with MoM increases of 1.4% and 1.0%, all higher than their respective consensus estimates.
• Personal Income and Outlays headline and core PCE inflation were 6.6% and 5.2% YoY (0.9% and 0.3% MoM). Meanwhile, the Dallas Fed trimmed-mean PCE accelerated to 3.7% YoY.
• The April U.S. ISM Manufacturing Index registered 55.4, short of consensus call of 58.0 while ISM Services registered 57.1, also short of consensus at 58.6.
• April U.S. PMIs (C, M, S) of 55.1, 59.7, 54.7 saw manufacturing readings surprise on the upside but services coming in under consensus.
• Eurozone and Japan PMIs (C, M, S) of (55.8, 55.3, 57.7) and (50.9, 50.7, 50.5) respectively had Europe exceeding on all three metrics and Japan registering mildly expansive results.
• The NFIB Small Business Optimism Index of 93.2 was within consensus range but slightly lower than the point forecast of 95.0.
• The April Consumer Confidence Index registered 107.3, higher than the 106.8 expectation and in line with the prior month. The April UofM Consumer Sentiment reading of 65.7 came in well above consensus of 58.8.
• The Case-Shiller Home Price Index rose 2.4% MoM and 20.2% YoY, both more than consensus expectations. New Home Sales of 763k were within the consensus range of 757k- 800k while Pending Home Sales fell 1.2%, in line with the -1.1% forecast.

• The April Housing Market Index was

While the bounce in the back half of March felt like a recovery, the upside move was limited to U.S.
equities and commodities while fixed income markets posted a fourth consecutive month of losses and
international markets struggled through a backdrop of the war in Ukraine. Volatility across equity and
interest rate markets remained elevated with the war and the removal of monetary policy
accommodation the key drivers.
U.S. equities (+3.48%) led the way in March with global ex-U.S. (+1.16) markets posting more modest
returns driven by commodity oriented geographies of Brazil, Norway, Denmark, Australia, and Canada.
COVID-19 lockdowns across China took mainland Chinese stocks down 8% and overall emerging markets
down 2.3% while economic risks stemming from the war in Ukraine pressured European equities to a
1.7% decline. The same war that pressured European equities resulted in Russian equities being
excluded from all standard indexes, effectively disappearing from the global equity market landscape.
Large cap stocks outperformed small caps and from a style/sector standpoint, value outperformed
growth led by energy, materials, and utilities.
Commodity markets benefited from supply disruption stemming from the Russia-Ukraine war and a safe
haven/inflation bid for gold. WTI oil (+4.76%) closed above $100 while natural gas surged 28%.
Commodity gains were broad based during the month with grains, industrial metals, and precious
metals participating in the rally.
From an economics and earnings perspective, the landscape looks relatively encouraging with the
glaring exception of the prevailing global inflationary conditions. The labor market is very tight with
unemployment nearly back to pre-pandemic record low levels. Both the services and manufacturing
sectors are solidly in expansionary territory with robust levels of activity while restrictive Covid health
policy measures have largely disappeared with China’s zero tolerance policy the only material global
outlier. As we move into the first quarter earnings season, the S&P 500 is estimated to post 4.5% profit
growth with a good possibility of hitting a fifth consecutive quarter of over 10% once earnings beat rates
and margins begin to take shape.

Market Anecdotes

• In what Bespoke coined the ‘immaculate correction’ we’ve seen earnings estimates rising with stock prices (and multiples) falling, reflecting a relatively constructive forward runway translating to P/E multiple compression given the Fed tightening cycle and prevailing geopolitical risks.
• Across twelve separate Fed speaking engagements, officials made clear the need for rates to reach neutral and move into restrictive territory, while maintaining flexibility along the way.
• A key decision point for the economy and stock market will be what level is the true ‘neutral rate’ of interest. Is it the FOMC’s terminal rate of 2.4% or is it closer to 3-4%? Stock markets would appreciate the Fed halting hikes below the neutral rate in the short term, policy would eventually have to counteract remaining too stimulative in the long-term

• Strategas increased the percentage likelihood of recession to 35% due to the economic impacts of Fed tightening, higher rates, inflation, supply chain disruptions, and commodity price shocks. Meanwhile, yield curve slopes and economic data continue to paint a constructive picture.
• European policy makers will attempt to offset the impact of the Ukraine crisis through looser fiscal spending and U.S. lawmakers have reopened the door to negotiations on the reconciliation package in a slimmed down version of the initial $3.5t proposal but several roadblocks remain.
• The BCA geopolitical team is assigning a high likelihood that China will help Russia manage U.S. sanctions leading to U.S. sanctions on China later this year.
• Sector leadership across the U.S. markets so far in 2022 is basically energy then everything else, a mirror image and clear departure from the technology led market over the past three years.
• U.S. equity markets falling and rising over 10% in a quarter is both very rare and perhaps (historically?) a positive setup to the coming months.
• While the stock market bounced sharply higher over the last two weeks of March, the bond market did not. Bianco Research noted March was the eighth consecutive month of losses for The Global Aggregate Index.
• March saw an inversion of the 2yr/10yr slope, triggering much hand wringing and recession talk. The reliability of the indicator and equity market performance following inversions are mixed at best.

Economic Release Highlights

• The March employment report showed payrolls increasing 431,000 (490,000 expected), taking the U3 unemployment rate down to 3.6% and the U6 unemployment rate down to 6.9%. Labor force participation edged up 0.1% to 62.4% – a tight labor market with supply in wait.
• The February Personal Income and Outlays reported personal income (0.5%a vs 0.5%e) and expenditures (0.2%a vs 0.5%e). YoY headline (6.4%) and core (5.4%) inflation were in line while MoM came in at 0.6% and 0.4%, respectively.
• Eurozone inflation jumped to 7.5% in March, well in excess of the 6.7% consensus estimate and largely due to a 44.7% spike in energy prices.
• The March Consumer Confidence reading of 107.2 was in line with consensus of 107.0.
• UofM Consumer Sentiment survey reading of 59.7 for March was a 3.1-point drop and below consensus expectation of 61.7.
• The Case-Shiller Home Price Index rose 1.8% in January, slightly ahead of consensus expectations for 1.4%. The YoY rate of appreciation was 19.1% versus an 18.4% consensus.
• U.S. Housing Starts (1.769mm), Housing Permits (1.859mm), and Existing Home Sales (6.020mm) were relatively in line with expectations.
• The March Housing Market Index fell just short of expectations at 79 versus consensus of 81.

• March ISM Manufacturing and Service index readings remained in expansionary territory but both slightly short of consensus (57.1 v 59.0, M) (58.3 v 58.5, S)
• Final Markit PMI data readings (C,M,S) for March across the U.S (57.7, 58.8, 58.0), EU (54.9, 56.5 ,55.6), and global (52.7, 53.0 ,53.4) showed a mix bag of results with the US slightly underperforming while EU readings beat consensus.
• China PMIs (C, M, S) of 48.8, 49.5, 48.4 fell into contractionary territory.

FOR THE MONTH OF JANUARY

January kicked off the new year with a thud, fueled by inflation/policy dynamics, geopolitical anxiety, robust corporate earnings, and ongoing Covid induced economic imbalances. Bond and equity markets adjusted to a gradual yet notable shift in Federal Reserve policy intent for 2022 by pulling forward expectations for increases in the Fed funds rate and the conclusion of quantitative easing. Markets moved from early January pricing in three rate hikes in 2022 to five or six by early February and to a more rapid tapering pace of the quantitative easing program, now set to conclude by mid/late March. Russia-Ukrainian tensions continued to build in January with energy markets pricing in the potential for wide scale supply disruptions, sending Brent crude oil prices up 20% for the month. Early results for fourth quarter corporate earnings painted a rosy picture with blended S&P 500 earnings +29.2% and revenues +15%, leaving the market priced at 19.7x P/E with many eyes on potentially vulnerable profit margins and surging CAPEX trends. The Omicron surge, and multitude of supply and demand distortions it fostered, quickly peaked and receded in January leaving many with the hope that pandemic trends may be finally shifting toward endemic status as we move into spring of 2022.

U.S. equity markets finished the month down 5.2% while international developed (-4.8%) and emerging markets (-1.8%) fared somewhat better thanks to their underlying market composition, cheaper valuations, and constructive growth outlooks. Value oriented stocks dramatically outperformed growth stocks during the month and large caps outperformed small caps. Bond markets weathered a sharp increase in interest rates with two year yields up 0.45% and ten year yields up 0.27% in what was also a notable flattening of the yield curve. Rising rates and an increase in credit spreads (high yield from 3.10% to 3.63%) resulted in one of the most difficult starts to the year for bonds on record as the Bloomberg Aggregate fell 2.15% and Bloomberg High Yield fell 2.73%.

Market Anecdotes

· Fourth quarter earnings reports came in with blended sales and earnings growth numbers of 15% and 29.2%, respectively, with 56% of the S&P 500 companies reporting. Top-line growth marked the 3rd highest on record, and earnings’ beats of 77% marked the 4th best on record.

· In a volatile month for the Nasdaq which saw a 15%+ correction, the end of January marked the best two-day rally dating back to April 2020 and the best two-day finish to a month since 1987.

· Both Tom Lee (FSI) and BCA Research made note that retail investor sentiment marked a fresh eighth year low in January, which has historically been a reliable contrarian indicator.

· For the first time since Jimmy Carter, a sitting POTUS has called on the Federal Reserve to raise interest rates, acknowledging the political costs of high inflation outweigh the cost of slowing the economy and potentially disrupting capital markets.

· BCA Research noted the pronounced need to restock inventories is likely to feed the U.S. economic expansion in the coming year through increased capital goods orders and capital expenditures to keep up with strong sales and demand.

· The January U.S. payroll report certainly swayed market policy expectations toward a more hawkish approach in 2022 with five hikes now priced in and essentially a coin flip for a sixth.

· Bond markets have been busy pricing in the monetary policy trajectory with 2yr UST yields now back at pre-Covid levels (January 2020) and, prior to that, at a level last seen five rate hikes into the last tightening cycle back in 2017.

· As yields globally are rising, the amount of negative yielding debt outstanding has declined 70% since late 2021 and reached its lowest level since March 2020.

· The ECB kept rates unchanged last week but certainly made note that Euro-area inflation overshot estimates by the largest margin on record (5.1%a vs 4.4%e), fueling a more hawkish leaning narrative looking forward.

· The BoE voted to raise the policy rate for the second consecutive month since 2004 by 25bps in a surprise 5-4 split decision. The other 4 voting members pushed for a 50bps increase in an attempt to reign in England’s recent 5.4% CPI reading.

· The PBOC cut policy rates (1yr lending and 7-day reverse repo) by 10bps in response to economic weakness resulting from both Covid and regulatory headwinds.

· The BoJ remained cautiously optimistic in their January meeting with their economic outlook and kept policy rates unchanged as expected.

Economic Release Highlights

· The January jobs report was beyond the highest estimate and tripled the consensus (467k v 150k) while a large increase in labor market participation (62.2%) and record numbers of workers missing due to illness took the unemployment rate up one tick to 4.0%.

· The January ISM Manufacturing and Services index readings remained very elevated and in line with expectations, registering 57.6 and 59.9 respectively.

· Final Markit PMI data (M, S) for January across the U.S. (55.5, 51.2), EU (58.7, 51.1), and global (53.2, 51.3) all pointed to slowing but growing levels of manufacturing and services activity.

· January’s UofM Consumer Sentiment (67.2 v 68.6) and Conference Board Consumer Confidence (113.8 v 111.2) readings were both within consensus range.

· The Personal Income and Outlays report metrics were in line with consensus with PCE Inflation (YoY, MoM) of 5.8% and 4.9% respectively and monthly PCE of -0.6%.

· Housing Starts (1.702mm) and Permits (1.873mm) both handily outpaced estimates and increased over the prior month but Existing Home Sales cooled off from prior month’s 6.46mm level and fell short of consensus (6.1mm vs 6.4mm).

For the month of December, 2021

The bull market marched on in December 2021, marking multiple new record highs on its way to a 4.48% return for the month, an 11% return for the quarter, and a whopping 28.71% return for 2021. The S&P 500 sits deeply in triple digit territory (+117%) since the Covid recovery rally began in March 2020 and has been far and away the top performing major equity index and market globally.  Small caps, depending on your index, were up nicely in December as well with the R2000 +2.2% while the S&P 600 closed up 4.53% (slightly edging out the S&P 500).  Developed international equity markets slightly outperformed their U.S. counterpart, closing up 5.1% in December while emerging markets managed only 1.9% gains thanks primarily to lagging returns from China (-3.2%) and Russia (-2.3%).  U.S. interest rates edged slightly higher with the 10yr UST closing just above 1.5% while a strong rally in WTI oil (+13.6%) and industrial metals pushed commodity markets higher for the month.  The USD weakened slightly versus most major currencies in December but finished the quarter (+1.53%) and year (+6.37%) firmly higher.

Key market drivers as we head into 2022 include sizing up the ‘stickiness’ of inflation data, key central bank policy decisions, and the forward trajectory of both corporate earnings and overall economic activity.  Overall, we feel the economy remains on a clear recovery path out of the Covid induced recession with more to come as the world slowly migrates back closer toward more ‘pre-pandemic’ economic behaviors.

Market Anecdotes

• The S&P 500 notched its 70th record closing high during 2021, coming up just short of 1995’s all-time record number of closing highs of 77. Not bad.
• S&P 500 index concentration remains at an extreme with Apple (6.9%) the largest issuer on record and the top 10 companies representing a whopping 30% of the index.  That said, Goldman Sachs noted that five of the largest stocks in the S&P 500 account for over half of the index gain since April and almost one-third of the index gain on the year.
• It was a busy month for world central bankers as they grappled with 40-year high inflation readings thanks to re-emergence of demand in the face of Covid induced labor and goods supply issues. The Fed and BOE are clearly leaning more hawkishly while the ECB, BoJ, and PBOC have remained relatively patient or in the case of PBOC even more accommodative.
• ‘How hawkish and how sticky’ might be the two questions of the year in 2022.  Final composition of FOMC voters is unclear with the voting rotation taking place at the January FOMC meeting introducing new Cleveland, Boston, St. Louis, and Kansas City regional voting Presidents. POTUS is also expected to name a new Fed banking regulator in early January.
• The Fed’s ‘conditioning’ of the market to price in a faster pace of tapering and earlier rate hikes which began in November, continued in earnest throughout December culminating in a formal mid-month FOMC confirmation of sorts.  
• All things equal, it’s clear that emergency Fed policy is clearly no longer necessary. Markets took the 2x increased pace of taper and commensurate earlier potential for rate hikes in stride. A move toward a June liftoff with March as a distinct possibility is now the Fed base case. 
• The BOE became the first major central bank to hike rates since the onset of the pandemic. Catalysts for the hike included a 10-year high inflation reading accompanied by another robust jobs number.
• The PBOC injected $188b into the Chinese banking system and made a 5bps rate cut during December in what were largely symbolic moves to signal a supportive bias given the below trend growth backdrop they’re experiencing domestically.
• December saw Washington DC pass a $768b National Defense Authorization Act, lift the debt ceiling past the midterm elections, and make moves to avoid another government shutdown.
• Odds of the ‘Build Back Better’ reconciliation spending bill passing during Q1 are at 58% with the biggest odds on the size of the package at 35% assigned to <$600b and 17% assigned to the $1.6t-$1.8t range. 
• European power prices are hitting record highs with high natural gas prices, nuclear power outages, and straining power grids combining for a perfect storm.

Economic Release Highlights

• December’s U.S. flash PMI (C, M, S) registered 56.9, 57.8, 57.5 which remained solidly in expansionary territory but came in slightly under consensus estimates.
• December’s Non-U.S. flash PMIs (C, M, S) for Japan registered 51.8, 54.2, 51.1, the Eurozone at 53.4, 58.0, 53.3, and China at 53.0, 50.9, 53.1.
• December’s ISM Manufacturing and Services Indexes registered 58.7 and 62.0 respectively, both expansionary but short of consensus estimates.
• The December Employment Report registered 199,000 jobs added, well short of expected 400,000. Unemployment Rate came in at 3.9% vs 4.1 expected.
• The Personal Income and Outlays revealed YoY headline and core PCE inflation at 5.7% and 4.7%, at and slightly higher than consensus. MoM figures of 0.6% and 0.5% rose at the same clip as the prior month and were also in line with expectations. Personal Consumption Expenditures of 0.6% cooled off from prior month’s 1.3.% level but was forecasted accordingly.
• Existing Home Sales rose 1.9% MoM to a 6.46mm annual rate, continuing a trend of reacceleration we’ve seen over recent months.  New Home Sales of 744k came in within consensus range but under forecast of 770k.
• December’s Consumer Confidence reading came well above consensus (115.8 vs 110.7) and beyond the high end of consensus range after a slight decline in November.

In what has been one of the weaker months of the year, markets in June saw stocks, bonds, and commodities all close higher to wrap up the second quarter and first half of 2021. The stock market finished the month at or near record highs even though we saw quite a bit of movement during the month including the worst performance week since October followed by the best performance week since February. After all was said and done, global stocks returned about 1.5%, with the U.S. leading the way. Bonds also contributed a positive return to portfolios in June due to falling interest rates while investors weren’t very concerned about the creditworthiness of borrowers. Commodity prices edged higher again last month because oil prices moved 10% higher but other commodities like gold, copper, and corn lost ground.

Key drivers during the month included progression of the Delta variant of Covid-19 and handicapping Fed policy looking into 2022 and beyond. While our overall view as we look forward remains relatively constructive with regard to the stock market, we are continually monitoring risks posed by the pandemic and possible mistakes made in Fed policy.

Market Anecdotes

• The NASDAQ surged over 5% in June while the S&P 500 and R2000 managed gains of approximately 2%. Technology, energy, and consumer discretionary sectors led the way while financials, industrials, and materials lagged.
• Technology stocks were dealt a victory in late June when a U.S. federal court tossed out an antitrust suit from the FTC seeking Facebook’s breakup.
• Toward month end, Bespoke noted the DJIA broke a record 10 consecutive days of open to close declines – testament to the old-fashioned grind experienced in June.
• Record IPO activity of over $175b has already broken the prior full year record of $168b set in 2020 and M&A deal volume is also breaking record highs. Cheap money and significantly increased visibility relative to 2020 are the primary contributing factors.
• The 10yr UST bond yield fell for five consecutive weeks which helped push technology stocks back into a position of market leadership. This sustainability is under debate.
• For the first time ever, inflation (5% CPI) is running higher than prevailing junk bond yields (4.54% YTM), leaving the high yield bond market with negative real returns.
• The June Fed meeting highlighted divisions within the committee regarding policy normalization (tapering and rate hikes). The data suggested the possibility of two hikes in 2023 which was a notable change from no hikes until 2024 back in March.
• The 2y1d OIS forward relative to the 5yr1d OIS forward is suggesting last week’s Fed narrative may be a hawkish policy mistake as opposed to endorsing the narrative or indicating a dovish policy error.
• OPEC’s production policy pushed oil to over $74 in June, its highest level in nearly three years and a 5x increase over lows last spring. Other commodities took a breather in June with industrial metals (-3.18%), precious metals (-6.92%), and lumber (-45%) weakening.
• Emergency Covid-19 extended unemployment benefits are being dropped in many states prior to September’s program expiration including four states June 12, seven states June 19, ten states July 2, and four more states announced for July 10.
• A bipartisan group of Senators reached a consensus on a $1.2t infrastructure package including $579b in new spending. Democratic strategy combining the bipartisan infrastructure agreement with a partisan reconciliation package leaves ultimate passage of the infrastructure bill unclear.

Economic Release Highlights

• May’s Personal Income and Outlays report revealed relatively flat consumer spending (-2.0%) but spending on services increased nicely and April’s tally was revised higher. Personal income fell again in May but by only 2% following April’s -13.1% fall from the March stimulus checks.
• Headline and core PCE increased 3.9% and 3.4% respectively, the fastest pace for the core reading since 1992. The blend of higher prices and supply chain issues were clear.
• The May CPI report left inflation very elevated with headline and core MoM readings of 0.6% and 0.7% respectively and YoY readings of 5% and 3.8%.
• The June Employment Report at 850,000 came in well above consensus calls for 703,000 and within consensus range of 520,000 to 1,000,000.
• The May JOLTS came in just under consensus forecast for job openings (9.209M vs 9.3M) but sits at all-time record high levels.
• U.S. Retail Sales declined more than expected (-1.3% v -0.5%) but are coming off sugar high levels over the past few months thanks to the fiscal stimulus backdrop.
• Eurozone Retail Sales came in at 4.6% MoM and 9.0% YoY, both well in excess of consensus expectations.
• June ISM Services Index came in lower than consensus and prior month release at 60.1 vs 63.5 while the Manufacturing Index remained sky high at 60.6.
• The May U.S. PMI report reflected a robust environment with the composite reading of 63.9, manufacturing at 62.6, and services at 64.8. The May EZ PMI report (C,M,S) of 59.2, 63.1, 58.0 exceeded consensus estimates on both manufacturing and services fronts.
• June Consumer Confidence Index, following a soft May reading of 117.2, came in well above expectations (127.3 v 119.0) and above the high end of the range.
• Case-Shiller Home Price Index (for April) continued to track near record levels, coming in slightly higher than consensus estimates with 1.6% MoM and 14.9% YoY growth rates.
• Home sales data released in June showed Pending Homes Sales surging (8% vs -0.8%), New Home Sales dropping unexpectedly (769k v 868k), and Existing Home Sales coming in above expectations (5.8mm v 5.715mm), up 44.6% YoY.

For the month of May

Prevailing market dynamics in May included generally encouraging CoVid trends, persistent fiscal and monetary stimulus, and robust global economic ‘reopening’ data.  The great inflation debate intensified during May with rising commodity prices, big upside surprises in headline CPI, and persistent supply chain issues driving the narrative. Financial markets and the Fed remained sanguine despite the near-term inflation dynamics, but policy makers began to condition markets for the eventual tapering of QE programs and wind downs of emergency CoVid related measures. May also delivered an eye-popping CoVid recovery earnings season with annual revenue and earnings growth over 10% and 50% respectively.   

U.S. equity markets briefly notched a new record high in early May but finished up only 0.4% for the month. Reopening momentum benefited the cyclical economic sectors (energy, materials, industrials, financials) while the technology complex and rate sensitive utilities lagged.  Developed international equity markets finished up 3.3% led by Europe (+4.2%) and South America (+8%) and emerging markets returned 2.3% despite little contribution from Chinese markets. 

Interest rates managed to fall slightly in May despite what seems to be a fairly robust global economic and earnings recovery and signs of inflation pressures building.  Commodities and the USD continued their respective trends in place since the end of the first quarter with commodities gaining 2.7% and the USD losing 1.4% on the month. 

Market Anecdotes

• First quarter earnings season came to an unofficial end in May with blended revenue of 10.7% and earnings of 51.9%. Unfortunately, those numbers were greeted with a yawn from the markets – despite EPS and revenue beat rates of 75% and a net 16% of all reporting companies raising guidance, the average earnings day performance was -0.45%.
• Financial market reactions to the highly anticipated move higher in inflation was informative with volatility pronounced in longer duration growth stocks, a relatively muted reaction in U.S. treasury markets, and commodities (oil, gold, metals) tracking higher across the board.
• Technicals for the S&P 500-tracking SPY ETF remain bullish, with the index’s multi-month uptrend holding nicely the last time support at the 50-DMA was tested in mid-May.
• A number of Fed speaking engagements sought to reassure markets the FOMC is not blinking in the face of the higher ‘transitory’ inflation data. However, at least five Fed officials have publicly commented on the likelihood of tapering conversations at the upcoming Fed meetings.
• With the BoC and BoE having announced plans to taper, timing of other major central banks looms. The Fed timing hinges on both inflation expectations and labor market improvements.
• Interest rates, after a surge higher in the first quarter, managed to retrace slightly in May with nominal and real 10yr rates falling from 1.65% to 1.58% and -0.76% to -0.84% respectively.
• POTUS unveiled a $6t fiscal 2022 budget package in May bolstered by $1.8t in deficit spending and tax increases to pay for the increase in spending.  
• Negotiations continued on the $1.7t Jobs Act (“infrastructure”) with both sides working on bipartisan talks and hopes of avoiding budget reconciliation to get the package through.
• Corporate taxes are likely to rise as part of the Jobs Act later this year which, under current proposal, represent an approximate 8% hit to forward earnings but tax credits and compromise will likely water that down to 5%.
• The American Families Plan proposed increase to the capital gains tax rate is more significant than the increase in the top marginal bracket. Tax motivated selling would be very likely, but BCA points out that a structural increase in the equity risk premium is not so clear.
• Bianco Research highlighted BEA and Bloomberg data illustrating the history of U.S. government transfer/assistance payments averaging 12%-15% for decades leading up to the GFC when assistance spiked to 18%. This figure dropped to 16.8% in February 2020, surged to 33.5% in March 2021, and currently sits at 22%. 
• Bianco Research visited the active/passive debate by illustrating ICI reported asset and fee trends. Active equity mutual funds charge 0.71%, equity index ETFs charge 0.18%, and equity index mutual funds charge 0.06%. Passive mutual fund and ETF products now account for 40% of all fund assets and ETFs accounted for 20% of all trading volume in 2020.
• PE funds last year raised $660 billion (compared to only $185 billion in 2010) and have already raised $345 billion so far in 2021. Dry powder (funds raised but not yet invested) now exceeds $2.2 trillion.
• Bitcoin again proved susceptible to public narrative and speculation. Comments from Elon Musk, China, and the U.S. government (IRS) sent a surge of anxiety into the crypto markets.
• Per Case-Shiller, U.S. home prices are rising at their fastest 8-month clip on record with inventories low and new supply creation still depressed.  That said, we expect the overall housing market and home prices to remain sensitive to interest rates and the economy.
• Commodity prices moved higher again in May due to the global growth recovery, supply chain disruptions, and inflationary concerns, resulting in a YTD return of 20.6%, the best 5-month total return for commodities since the inception of the data series in 1973.

Economic Release Highlights

• The May jobs report registered 559,000 jobs vs expectations for 650,000 but the unemployment rate fell .1% to 5.8%.  
• Record high job openings illustrated by the April JOLTS report (9.286mm), falling labor market participation (61.6%), and increasing average hourly earnings (MoM +0.5% / YoY +2.0%) are raising questions about work incentives and concerns that employers are being forced to raise wages to overcome labor shortage issues. 
• The May CPI report left inflation very elevated with headline and core MoM readings of 0.6% and 0.7% respectively and YoY readings of 5% and 3.8%.  
• Monthly and annual headline PCE Price index increased 0.6% and 3.6% while core PCE readings came in at 0.7% and 3.1% respectively.  The PIO report showed MoM personal income contracting 13.1% and personal consumption expenditures increasing 0.5%.
• April Retail Sales report fell short of expectations coming in flat MoM versus 1% consensus after a 9.8% surge in March. 
• The U.S. April manufacturing PMI improved to 61.5 while services improved to a lofty 70.1. U.S. composite improved from 63.5 to 68.1, a new record high.
• Eurozone April manufacturing PMI hit 62.8 with record growth of backlogs while services activity rose at the fastest pace since January 2018 to 55.1.
• The May ISM Manufacturing Index came in above expectations at 61.2 v 60.9. The JPM Global Manufacturing PMI also improved marginally in May to 56.0. The May ISM Services moved higher over the last two months to 64.0, above consensus estimate of 63.1.
• New (863k v 955k) and Pending (-4.4% v +0.4%) Home Sales both fell short of expectations after a surge in March.  The Case-Shiller Home Price Index showed a 13.3% YoY (1.5% MoM) jump in home prices, well beyond the 11.8% consensus.
• April Housing Starts (1.569M v 1.705M) and Permits (1.760M v 1.755M) were slightly mixed after a strong beat in March.

A backdrop of robust global economic data, strong Q1 earnings reports, and a retreat (albeit uneven) of the CoVid pandemic produced broad based strength across the financial markets in April. After lagging January through March, growth stocks benefited from a break in the rising interest rate dynamic of the first quarter. Commodities and international equities both benefited from a weaker USD and an improving global growth outlook due to stabilizing CoVid trends and a continuation of global fiscal/monetary stimulus. From a risk asset perspective, market participants seem to be looking past pandemic dynamics toward herd immunity and re-opening economies.  April’s strength across global economies and stock markets coupled with declining interest rates seem somewhat at odds with one another unless you view the bloodbath in Q1 bond markets as perhaps having gone a bit too far. Overall, monetary and fiscal policies around the world remained very accommodative with some indications (futures markets, China, Canada) that moves toward policy normalization may not be too far away.  

During April, the S&P 500 returned 5.2%, growth stocks outperformed value stocks, and international stocks were up approximately 3%. Interest rates and bond markets were fairly benign.  U.S. rates declined slightly as 10yr UST yields fell from 1.74% to 1.65% and 2yr UST yields declined from 0.92% to 0.86%.  Commodities jumped 8.3% with participation across energy, agricultural, industrial metals, and precious metals. Currency markets saw the USD resume its weakening pattern, down 2.09%, after a countertrend rally during the first quarter.

Market Anecdotes

• Corporate earnings were very much in focus in April. With 88% of the S&P 500 having reported earnings, FactSet has the beat rate at 86% and beat margin at 22.8%, both very elevated. Blended earnings and revenue growth are tracking at 49.4% and 10% respectively with elevated beat rates and beat margins on revenue as well.  
• This year is now four months old, but already the S&P 500 has had over 25 record closing highs which qualifies as an above average full year and on pace to eclipse the best two years of record closing highs since 1950 (1964 and 1995).
• Bond markets were positive across the board in April after a historically bad first quarter. Both interest rates and credit spreads fell during the month. High yield spreads traded below 330bps while investment grade spreads were under 100. Bespoke noted investment grade spreads relative to interest rate risk (duration) are at their lowest level since 1997.
• The Recovery Act, the Made in America Plan, and the American Families Plan will establish the U.S. as the top fiscal spender globally. BCA’s geopolitical group is assigning an 80% probability to passing the infrastructure plan and 50% to the Families plan.
• Details on The American Families Plan ($1.8t) released in April included several proposed tax law changes: top bracket from 37% to 39.6%, a near 2x increase on capital gains for incomes >$1mm, elimination of carried interest provision, and more investment in the IRS.
• The Made in American Plan is expected to hit 2022 earnings by approximately 8% as advertised but may be watered down to a 5% hit after compromise. BCA expects pressure to continue to raise corporate taxes well beyond 2022 given the current backdrop.
• U.S. government debt is projected to hit 102% of GDP this year – highest debt-to-GDP ratio since 1946. At the same time, the annual deficit is expected to reach $2.3t (10.3% of GDP) – the second-largest shortfall since 1945 behind 2020’s record $3.1t (14.9% of GDP). 
• The European Parliament formally approved a trade deal last month with Great Britain ending a five-year saga in a favorable outcome for the global economy.
• U.S. corporate bond issuance has started out on pace to outpace record issuance we saw in 2020 as companies race to lock in cheap financing.
• Per Case-Shiller, U.S. home prices are rising at their fastest 8-month clip on record (+11.97% YoY in February) with inventories low and new supply creation still depressed. We expect the overall housing market to continue to thrive while home prices will remain sensitive to both interest rates and the health of the economy.  
• The April FOMC meeting and communique revealed nothing new although there are some voting members beginning to ‘discuss the need to discuss’ tapering and next steps. QE and low policy rates are going nowhere for the time being.
• Bank of Canada was the first developed market central bank to announce their intent to begin tapering bond purchases leading to speculation on policy rates and QE tapering of the Fed, ECB, BoE, and other central banks. 

Economic Release Highlights

• The April jobs report came in significantly below consensus (266k vs 998k), taking the unemployment unexpectedly higher to 6.1%.
• U.S. April flash PMIs followed up an unusually strong March by topping 60+ level estimates across all three measures (62.2c, 60.6m, 63.1s).
• April flash PMIs for Japan (50.2c, 53.3m, 48.3d) and the Eurozone (53.7c, 63.3m, 50.3s) also beat across the board, posting healthy numbers across both manufacturing and service sectors.
• The April U.S. ISM Manufacturing and Services Indexes both missed consensus by a good margin (60.7 vs 65.0) and (62.7 vs 64.2) respectively.  Supply chain issues are the more likely culprit than weakening demand.
• China’s official and Caixin PMIs sent contradictory messages in April. The composite PMI declined to 53.8 from 55.3 on greater than anticipated slowdowns in both the manufacturing and non-manufacturing sectors while the Caixin manufacturing PMI surprised to the upside and accelerated to 51.9 from 50.6.
• First estimate of U.S. Q1 GDP came in near consensus estimates of +6.7%, registering a 6.4% QoQ annual rate. Personal consumption surged 10.7% QoQ AR which contributed significantly to the headline number.
• U.S. Personal Income surged 21.1% in March thanks to the fiscal stimulus package which pushed personal spending +4.2% MoM and personal savings rate back up to 27.6%.
• US core PCE price index grew 0.4% in March (up from 0.1% in February), bringing the YoY to 1.8% but March PCE inflation annualized to 4.9%. 
• UofM Consumer Sentiment increased in April to 88.3 and Consumer Confidence jumped 12.7 points to 121.7 (113 forecasted), its highest reading since February 2020.
• April U.S. housing market data remained buoyant with the Housing Market Index hitting consensus of 83, Starts (1.739m v 1.620m) and Permits (1.766m v 1.750m) both beating expectations, and New (1,021M v 887K) and Existing (6.010M v 6.205M) sales somewhat mixed.