May 3, 2022

The U. S. equity market experienced a difficult month in April as investors reduced risk positions in the face of sharply higher interest rates and uncertainty over the economic impact of a tighter monetary policy.  Furthermore, the continuation of the Ukraine conflict is not helping temper the inflation outlook and the Federal Reserve’s probability of success on the inflation-taming/soft landing front remains debatable.  The S&P 500 index declined 8.7% for the month, with Communication Services (-15.6%), Consumer Discretionary (-13.0%), and Information Technology (-11.3%) all experiencing double-digit losses.  The defensive Consumer Staples sector (+2.6%) was the only sector to register a gain in April.  Value was the clear winner across all market cap ranges for the month as sharply higher interest rates ( 10-year Treasury yield + 0.54% to 2.93%) damaged growth stock valuations, however quality was not a favored performance factor despite the sharp drawdown in share prices.  Mid-cap stocks were the best performing market-cap range.

The global economy is clearly slowing, with Covid shutdowns in Asia and the continuing war in Europe.  However, the U.S. economy remains strong for now, driven by a resilient consumer and rebounding service sector.  The labor market is very strong with 50+ year lows in both initial and continuing unemployment claims.  Soaring inflation is a real problem and unlikely to ease much with rising wages and rents and commodity supply shocks arising from the ongoing Ukraine war. The Federal Reserve is behind the curve and turning increasingly hawkish.  They have never engineered a soft landing with inflation this high and unemployment this low.  The stock market is likely to remain volatile and on the defensive until geopolitical tensions ease and evidence emerges that inflation is moderating.

Our client portfolios remain concentrated in high quality, secular growers that should be able to overcome a slowing global economy, rising inflation, rising interest rates, and still deliver attractive profit growth in the period ahead while withstanding the volatile market environment we are currently experiencing.