- May 11, 2022
-- In a year that has featured plenty of volatility, last week's daily stock-market swings, which included both the largest daily gain and daily decline of the year, may have felt like something new was afoot. We would hardly file this under "much ado about nothing," but we don't think this should be interpreted as a sign that a new threat or narrative to the market has surfaced. Instead, we think this volatility is an ongoing symptom of this phase in which markets are struggling to handicap the outcome of this faceoff between Fed tightening and a still-viable expansion.Coming into May, here's what we knew:
Given what transpired last week, here's what we know:
- Inflation is running too hot for comfort.
- The Fed is in the early stages of a tightening campaign aimed at curbing those inflation pressures.
- The underpinnings of the economy are reasonably sound, supported by a historically tight labor market and healthy consumer finances.
- Corporate America is holding up fairly well, with profits expected to rise at a decent clip this year.
- Stocks are under pressure amid an increasing fear that the Fed is going to topple the economy into recession.
- Bonds are enduring similar pressure amid sharply higher interest rates.
- Inflation is still running hot, but the latest trends indicate inflation is peaking and headed gradually lower.
- The Fed has executed the first of several outsized (0.50%) rate hikes, but it's not looking to pursue larger (0.75%) hikes or an even more aggressive pace of tightening.
- Ongoing supply disruptions stemming from the lockdowns in China, along with elevated consumer prices exacerbated by high oil prices, pose headwinds for the economy, but employment conditions continue to paint a positive picture for consumers.
- Corporate earnings are not immune to the rising-cost environment, but resilient profits remain a pillar of support.
- The correction in the stock market continues to run its course, with tech under pressure as valuations get repriced for higher rates.
Put plainly, while extreme swings in the markets may seemingly imply increased uncertainty, events and data last week simply confirmed what we already knew -- the Fed is going to keep tightening and the economy is still in decent (but not perfect) shape.