April 2022 Review and Outlook
Executive summary:
- Markets tumbled on Fed rate hike expectations
- Federal Reserve rate hike odds pricing in multiple 50bps moves
- Credit spreads widened as financial conditions tightened
- US mortgage rates top 5% for the first time in over a decade
- 81% of S&P 500 companies reported positive earnings surprises for 1Q22
Carnage and velocity are the words that come to mind when thinking about the markets in April. The broader markets were battered as large-cap growth stocks fell double-digit percentages, the worst April on record since 2000, while large-cap value “outperformed,” falling only 5.6%. Financial conditions, a cross-asset measure of market health using a weighted average of riskless interest rates, exchange rate, equity valuations, and credit spreads, have tightened over the month ahead of the highly anticipated 50bp interest rate hike from the Fed in early May. All signs point to an official end to the “Powell-put,” as the market no longer believes the Fed will ease every market stress. As of the end of April, the market is pricing in 50bp hikes over the next three Fed meetings.
Selling has been most intense in longer duration growth stocks due in part to sharply rising rates, but there has also been pressure on corporate credit, as seen in the below CDX High Yield chart. CDS spreads, which typically measure the difference in yields between corporate bonds and risk-free government bonds, are now just below the 2018 highs as investors demand greater returns for taking on credit and liquidity risk from corporates.
Volatility permeated global currencies in April. Excluding the March 2020 Covid spike, the U.S. Dollar Index (DXY) jumped to highs last seen in 2016. Japan, in particular, saw huge declines in its currency as the central bank continued its 10-year bond-buying program to help finance the government’s stimulus package, which included subsidies for rising gasoline prices and support for small businesses. China continued with its Covid zero policy, shutting down essentially 40% of the world’s second-largest economy. Despite stimulus plans, the lack of activity dampened Chinese (and global) growth expectations. Furthermore, with the Chinese economy locked down, supply-chain disruptions could further exacerbate already heavy inflationary pressures. Slower growth could relieve price pressures on certain commodities though we have yet to see substantial moves lower in most.
On a total return basis, Consumer Staples was the only sector in the green on the month, finishing higher by 2.6%. Energy stocks slipped (1.5%) but remained sharply higher for the year at 27.6%. On the other end of the spectrum, the Communications sector declined 15.6%, followed by Consumer Discretionary (13%), Technology (11.3%), and Financials (9.9%). REITS, Basic Materials, Utilities, and Health Care were down between 3-5%, while Industrials ended down 7.5%.
Markit US CDX HY:
Economic Data:
Real GDP fell at an annual rate of 1.4% in the first quarter of 2022, according to the Bureau of Economic Analysis, below the expected growth of 1.0%. Fourth-quarter real GDP increased by 6.9% for context. The decrease in real GDP was largely a result of decreased private inventory investment, exports, Federal, state, and local government spending, while imports increased.
Rate Hike Odds:
US 2YR Yield:
US 10YR Yields:
US 30YR Yields:
GDP YoY:
CPI Inflation – YoY:
CPI Inflation – MoM:
Housing:
U.S. home prices continued to grow at a record pace, registering a 20% YoY increase in February (which was reported in early April). This record high marked the 12th straight month of double-digit gains for the index as buyers continued to outnumber sellers and inventory remains depressed. According to CoreLogic Chief Economist Frank Nothaft, “New listings have not kept up with the large number of families looking to buy, leading to homes selling quickly and often above list price. This imbalance between an insufficient number of owners looking to sell relative to buyers searching for a home has led to the record appreciation of the past 12 months. Higher prices and mortgage rates erode buyer affordability and should dampen demand in coming months, leading to the moderation in price growth in our forecast.” Mortgage rates ballooned out to over 5.4% over the month as Treasury yields continued to climb amidst a backdrop of elevated inflation and impending rate hikes from the Federal Reserve.
CoreLogic: House prices up 20% YoY in February
MBA Purchase Index: Weekly report of mortgage loan applications based on a sample of 75% of U.S. mortgage activity
30Y US Home Mortgage Rates:
Commodities/Currencies:
DXY:
WTI Oil:
Earnings:
Outside of the Federal Reserve and geopolitical headwinds, April also saw the start of 1Q ’22 earnings prints. With difficult comps due to unusually high earnings growth in Q1 2021, earnings growth rates are in the single digits for the first time since Q4 2020.
With almost 55% of S&P 500 companies having reported fourth-quarter earnings, we have seen 81% of companies report positive earnings surprises, with an average beat of ~3.5%. This is above the five-year average of 77% but below the five-year average beat of 8.9%. On the growth front, 67% of companies have reported earnings growth, with an average growth of 3.2%. 1Q earnings growth is running at about 7%, better than the 4.7% expected at the beginning of the quarter, but not enough upside surprise to counter other market headwinds.
Per Bloomberg estimates, Consumer Staples companies led the way in terms of the number of companies reporting earnings surprises with 94% beating estimates, followed by Industrials with 91%. Energy was actually the laggard, with only 60% of companies reporting earnings surprises, but they carried the load in terms of earnings growth. From a growth perspective, 90% of Energy companies reported positive earnings growth, with an average growth rate of over 245%. 80% of Industrials companies reported earnings growth at an average of just under 49%, followed by Industrials average earnings growth of ~37%, and Real Estates 27%. Consumer Discretionary and Financials were a drag on the averages as they saw negative earnings growth of 46% and 21.6%, respectively.
The forward 12-month PE for the S&P 500 is 18.1, which is slightly below the five-year average (18.6) but above the 10-year (16.9). It is also below the 12M Forward P/E of 19.4 as of March 31, as prices have slid while EPS estimates have increased.
In terms of price action following earnings prints, Consumer Staples saw the largest positive 2-day move, climbing an average of 2.0%, followed by Technology at 1.8%. All other sectors saw negative 2-day price action, with Communications companies falling the hardest at (4.4%), followed by Health Care (2.8%), Utilities (2.2), Real Estate (1.7%), Consumer Discretionary (1.3%), Material (1.1%), Financials (1.0%), Energy (0.6%), and Industrials (0.1%).
Looking Ahead:
All eyes will be on the Federal Reserve on May 4 to see if it follows through with what is expected to be the start of a 50bp rate hike campaign. With the market already down double-digit percent from 52-week highs, it will be interesting to see if the Fed keeps its foot on the rate hike pedal if stocks continue to fall. May also brings the back half of corporate earnings season in what is seasonally a bad month for stocks. Over the past 90+ years, the S&P 500 averages a (0.1%) return in May, while April historically has returned an average of 1.4%. The question for the market is, does the adage “Sell in May and go away” still apply given the losses seen in April and YTD, or are we close to a bottom?
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The Market Intelligence Desk Team
Nasdaq
Nasdaq’s Market Intelligence Desk (MID) is designed to provide critical touch-points for timely trading analysis and market information.