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Sightline Weekly Market Update: Market Volatility Continues as Economy Slows

Concerns over inflation, rising interest rates, and the impact on the economy caused by the war in Ukraine weighed on the major equity indexes for the fifth consecutive week, with all major indices losing ground in the week. Growth stocks bore the brunt of the losses as valuations are repriced for higher rates. By the end of the week, the Dow was the last of the major US indexes to enter correction territory, falling more than 10% from its recent highs. The Nasdaq and the Russell ended the week in bear market territory, losing over 25% from their highs in November. The Dow lost 24 basis points in the week; the S&P 500 lost 21 basis points, followed by the S&P 400 Midcap market sliding 0.77%. The Nasdaq and the Russell dropped over 1% in the week, falling 1.54% and 1.32%, respectively. The TSX only lost 0.6 on the week, with oil gaining 5.6% and supporting the index. Europe suffered considerably from worries of a more hawkish stance by the ECB to control inflation and Ukrainian concerns. The pan-European STOXX Europe 600 Index tumbled 4.55% in the week. The other major European Indices came under pressure, with the French CAC 40 dropping 4.22%, the German Dax Index falling 3.00%, and Italy’s FTSE MIB Index losing 3.20%. The UK’s FTSE 100 declined 2.08%.

Last week, the Manufacturing ISM Index achieved a 23rd consecutive month of growth with a reading of 55.4%, down 1.7% from March’s reading of 57.1. (Any number above 50 suggests growth). However, the components also registered in the growth range were slower than the previous readings in March. For April, the new orders reading was 53.5, slipping 0.3% from March. The Production Index decreased 0.9% to 53.9%, and the Prices Index dropped 2.5% to 84.6% from the March reading of 87.1%. Generally, the manufacturing sector continues to struggle with inflationary pressures and is constrained by labor and supply-chain issues. The cost of energy and global energy instability weighed on participants surveyed. Those surveyed remain strongly optimistic about the short-term future.1 Also last week, the latest construction spending data released by the Commerce Department showed construction spending rose by 0.1% in March after a 0.5% increase in February. Expenditures in the private sector increased by 0.2%, offset by investment in non-residential structures declining by 1.2%. As mortgage rates push over 5%, residential demand momentum could slow.2

The Department of Labor released the job openings for the last business day of March at a series high of 11.5 million. The number of people quitting also hit a high, rising to 4.5 million. While the number of available job openings and quit rates speak to the job market’s strength, it also can indicate the difficulty businesses are having maintaining staff count, making it hard to keep pace with demand for goods and services.3 In other economic indicators, orders for manufactured goods increased in March by 2.2%, and the international trade deficit in goods and services increased to $109.8 billion from $89.8 billion in February.4 The ISM barometer of business conditions at service businesses such as banks, retailers and hospitals fell 1.2 points in April to 57.1%. Economists polled by the Wall Street Journal had expected a reading of 58.3%. The slowing momentum in the reading from a high of 60 last year stems from high inflation, labor shortages, higher energy costs and supply-chain problems.5

Last Wednesday, the long-awaited announcement by Fed Chairman Powell on rates did not disappoint. Considering the recent data, some speculated a possible 0.75% rate increase, but the increase was held to .50%, the biggest move in over 20 years. In the news conference that followed, Powell kiboshed the notion of a .75% increase at the next meeting. Market participants responded initially with a resounding market rebound, followed by a matching sell-off the next day. He also outlined the plan to reduce the Fed’s $9 Trillion balance sheet starting June 1 by letting $30 billion of Treasuries and $17.5 billion of mortgage-backed securities roll off. Further, he stated he understood the hardship Americans face because of high inflation, and he repeated the Fed’s commitment to bringing it back down.6 With data suggesting the economy is slowing, the Fed hopes to manage a soft landing in the coming months as higher rates slow demand.

Initial unemployment claims for the week rose by 19,000 to 200,000 compared to 182,000 expected by economists polled by the Wall Street Journal. Continuing claims for all benefits fell by 19,000 to 1.38 million, the lowest level since early 1970.7 In reflecting the ongoing supply and labor shortages, the US Bureau of Statistics reported nonfarm business sector labor productivity decreased by 7.5% annualized in the first quarter of the year. The amount and goods and services produced fell by 2.4% in the first three months. Unit-labor costs jumped 11.6% annualized over the same period. The latest unit-labor costs rose at the fastest clip in 40 years.

The continuing bright spot in the economy is the tight labor market. Other data suggest the economy is slowing, and investors are concerned about the timing and severity of the coming recession. Unfortunately, the debate and resulting sentiment will cause the markets to swing from one news event to another in the coming months.

 

Sources:

1 https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/pmi/april/

2 https://www.reuters.com/world/us/us-construction-spending-rises-less-than-expected-march-2022-05-02/

3 https://www.bls.gov/news.release/pdf/jolts.pdf

4 https://www.census.gov/economic-indicators/

5 https://www.morningstar.com/news/marketwatch/20220504484/the-us-economys-service-side-slowed-in-april-due-to-high-inflation-and-shortages

6 https://www.cnbc.com/2022/05/04/fed-raises-rates-by-half-a-percentage-point-the-biggest-hike-in-two-decades-to-fight-inflation.html

7 https://www.marketwatch.com/story/u-s-jobless-claims-jump-in-latest-week-by-biggest-amount-since-last-july-11651754614?mod=economy-politics

8https://www.bls.gov/news.release/prod2.nr0.htm

 

Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors primarily through fee-based accounts.

Sightline Wealth Management LP is a wholly owned subsidiary of Ninepoint Financial Group Inc. (“NFG Inc.”). NFG Inc. is also the parent company of Ninepoint Partners LP, it is an investment fund manager and advisor and exempt market dealer. By virtue of the same parent company, Sightline is affiliated with Ninepoint Partners LP. Information and/or materials contained herein is for information purposes only and does not constitute an offer to sell or solicitation to purchase securities of any issuer or any portfolio managed by Sightline Wealth Management or Ninepoint Partners, including Ninepoint managed funds.

The opinions and information contained in this article are those of Sightline Wealth Management (“Sightline”) as of the date of this article and are subject to change without notice. Sightline endeavors to ensure that the content has been compiled from sources that we believe to be reliable. The information is not meant to be used as the primary basis of investment decisions and should not be constructed as advice. Each investor should obtain independent advice before making any investment decisions.

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