Sightline Weekly Market Update: Understanding the Latest GDP Estimates
North American equity markets finished the week in the red, as did European equity markets. US and Canadian Investors responded to earnings announcements and the deteriorating global growth, whereas European investors focused on the Ukrainian crisis, energy supplies, and a slowing US economy. The Dow Jones fell 2.47%, the S&P 500 dropped 3.27%, and the Nasdaq 3.21%.
The S&P 500 is down 14% from its high, and the Nasdaq is down 24% from its high late last year. Since November of 2021, bearish momentum has dominated the Nasdaq, which started with analysts adjusting the discount models of high-flying, no-earnings tech issues lower. The expectation of slowing growth and higher inflation has added fuel to the bearish momentum. The S&P 400 MidCap index fell 3.21%, and the Russell small-cap market finished the week 3.95% lower. Energy regained positive momentum when Russia announced it was cutting off gas exports to Poland and Bulgaria. The oil price gained 2.2% in the week, but it wasn’t enough to hold the TSX in positive territory, with the index falling 2% in a week. In Europe, the pan-European STOXX Europe 600 index fell 0.64%, with the major European indices falling slightly in the week, supported by Macron’s victory in the French run-off election, which promised a continuation of the current economic and political direction. The UK FTSE 100 ran counter to the mainland’s trend and advanced 0.30% on the week.
Other than corporate news, the week’s big surprise was the Commerce Department’s advance GDP estimate showing the economy contracted at an annual rate of 1.4% in Q1 versus the expected 1% growth and the 6.9% growth in Q4 of 2021. One of the main factors that led to the negative GDP number was the trade of net exports, which reduced the GDP by 3.2%. The goods trade deficit recorded a record high in March, resulting from imports outpacing exports as world economic conditions continue to slow. Lower inventories added to the negative GDP report by about 0.84% as businesses continue to be challenged by supply shortages. On a positive note, personal consumption rose 2.7% versus the expected 3.5% and 2.5% in Q4 of last year. Core personal consumption rose 5.2% in the quarter versus the estimate of 5.5% and 5.4% in Q4. Business investment increased at 7.3%, well above expectations. 1,2 Given the current personal consumption and the business investment data, it could be too early to suggest a recession is just around the corner. However, investors are becoming increasingly nervous despite order backlogs and tight labor markets.
According to FactSet, 55% of the S&P companies have reported corporate earnings, with 80% of the reporting companies beating estimates, however, at a lower level than in the past five years. Companies are reporting earnings that are 3.4% higher than estimates compared to the five-year average of 8.9%. Technology, healthcare and communication services led, with consumer discretionary offsetting with negative earnings surprises. Energy companies continue to drive overall revenue growth. When looking at revenue, 72% of S&P 500 companies reported actual revenues above estimates. In aggregate, companies are reporting revenues that are 2.2% above estimates, which is above the five-year average of 1.7%.3
In other economic data on Friday, the core capital goods orders (ex-defense and aircraft) advanced 1%, double the consensus expectations, while personal spending rose 1.1% compared to expectations of 0.7%. The Fed’s most preferred inflation gauge, the personal consumption expenditures (PCE) price index, slid to 5.2% in March, the first pullback in over a year. The year-over-year headline PCE reached a 40-year high (6.6%) and fell short of expectations. Despite a slip in consumer confidence, the latest reading of 107.3 from 107.6 is well above pandemic lows, and consumers’ outlook on inflation has improved slightly to 7.5% from 7.9% in March. The jobless rate fell to a two-year low of 3.6% in March. With over 11.3 million job openings, it is likely growth will continue as manufacturing continues to restock low inventory levels and improve manufacturing processes by implementing technological improvements.4
The current equity markets reflect a general air of uncertainty that is not likely to disappear any time soon. As the global economy struggles with the bifurcation of the world economy, war, higher rates, and inflation, recessionary pressures are likely to accelerate in the coming months, causing investors to reallocate capital to safer havens.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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