April 25, 2022

The global economy continues to slow due to war-related supply shocks and Covid shutdowns in China. While Europe’s and China’s states of decline may pull the global economy down, the U.S. economy, for now, remains strong, supported by a resilient consumer and a rebounding service sector.  The labor market remains robust with continued strong job gains and 50+ year lows in both initial and continuing claims.  Housing remains strong, but spiking mortgage rates along with rapidly rising home prices are a cause for concern.  We are paying close attention for signs that affordability is starting to impact housing demand.

Oil and commodity prices may be peaking which, along with easing supply chain stress, is fueling hopes for peak inflation.  However, inflation will likely remain elevated with pressure from rising wages and rents.  The Federal Reserve (“Fed”) is behind the curve and increasingly turning more hawkish.  Federal Reserve Chairman Jay Powell essentially confirmed a 50 bps rate hike in May with more to come.  The Fed has never engineered a soft landing for the economy when inflation has been this high and unemployment this low.

While recession risk is increasing, we still expect growth in the economy and corporate profits in 2022.  Once again, first quarter earnings season is so far delivering positive surprises and upward revisions at the same time that investor sentiment has turned very gloomy.  If S&P 500 estimates continue to move higher, with stocks now at the low-end of their recent trading range and sentiment so negative, it would not surprise us to see a brief near-term bounce ahead of the typically weaker May to November seasonal trading period.  But until geopolitical tensions ease and evidence emerges that inflation is moderating, we expect the market to remain volatile and on the defensive with rising profits likely offset by a rising equity risk premium (i.e., P/E multiple compression).

We continue to monitor for risks including: (1) geopolitical (further Russian escalation/China moves on Taiwan), (2) margin pressures that may lead to disappointing profits, and (3) supply shocks and/or aggressive Fed tightening that lead to recession.