- May 17, 2022
-- After the worst start to a year since 1932 that has left the S&P 500 within breathing distance of the 20% bear-market threshold, the question all investors are asking is: When might the market pullback run its course?1
Since hitting an all-time high on the first trading day of the year, major indexes have been in a steady downtrend and made a fresh one-year low last week. The new regime that financial markets are dealing with is defined by lingering inflationary pressures, monetary-policy tightening, and heightened geopolitical risks.
We think that it will likely require greater clarity on the inflation outlook for markets to find a durable bottom. Yet, at the same time, the risk-reward for equities has now improved as valuations have adjusted lower, fundamentals remain sound, and sentiment already reflects a more bearish outlook. We'd offer the following perspective on last week's highly anticipated inflation reading and lay out the conditions that are likely needed for the bull market to get back on track.
Source: 1. Bloomberg
- The hope last week was that the release of the consumer price index (CPI) would show a meaningful cool-down in inflation, providing some relief for growth-style investments that have been pressured by the Fed policy shift. While the April CPI ticked down from March, signaling a peak, both the annual and monthly pace of increases surprised to the upside, confirming the need for the Fed to stay hawkish.
- Headline CPI increased 8.3% in April down from 8.5% in March and core CPI (excludes food and energy) increased 6.2% down from 6.5%. The attention, though, was on the 0.6% monthly gain in the core index, which was the largest in three months and driven by an acceleration in services costs. Among categories that stood out, rents climbed 0.6%, and airline fares surged 18.6%, as travel demand rebounded strongly1. Housing will likely remain a source of upward pressure in the short-term, but the sharp rise in borrowing costs should start to cool prices.
- On the other hand, goods inflation moderated, as used-car prices declined for the third consecutive month and as prices for clothing and appliances fell. With consumer spending rotating back to services from goods and supply chains improving (the timing remains uncertain because of the lockdowns and China and war in Ukraine), we would expect further easing in the months ahead.