By: Stash Graham
The volatility of markets was on display again during April as renewed selling pressure undid the strong two-week rally at the end of March. The Nasdaq Composite Index reentered bear market territory on April 29th (20% correction from the highest value). Nasdaq had the worst monthly performance since the Great Financial Crisis (November 2008), while the S&P 500 has had its worst start since 1970. Variables ranging from an increasingly hawkish Federal Reserve to a growing lockdown in China were heavy headwinds to financial asset prices. The S&P 500 was down -8.8% for the month, while the Dow Jones Industrial Average (DJIA) declined by -4.91%. The Nasdaq Composite Index was down -13.26%. Year-to-date, the Nasdaq is down an eye-watering -21.6%, while the S&P 500 lost -13.31%. The DJIA slid by -9.25%. Relative to these benchmarks, we are happy to report our steady outperformance during the month of April. On a year-to-date basis, our outperformance materially expanded.
Commentary from members of the Federal Reserve skewed hawkish as there was a rise in the expectations on the number of basis points that borrowing rates would increase. This rise in expectations saw the interest rate of the 10-year U.S. Treasury increase 50 basis points as the benchmark U.S. treasury almost eclipsed 3% for the first time in years. With the 10-year U.S. Treasury interest rate continuing to rise, the discounting of future earnings of businesses increases. Thus the continued selling pressure of high duration stocks remains strong until we see a stabilization or decline of the 10-year U.S. Treasury. Separately the growing developments of lockdowns in several important Chinese production slash logistics cities could put a material dent in the amount of supply available for purchase in the coming months. We must monitor this as a tail risk for inflation because early commentary from transportation and logistics professionals indicates that the lockdown in these hubs is worse than in 2020. In addition, technology giant Apple, just days ago, warned of the impending renewed supply constraints.
On the economic front, the first-quarter real gross domestic product (GDP) provided us with our first headline contraction since the COVID recession. The headline real GDP print was a -1.4% decline for the first 90 days of 2022. We should emphasize that this quarterly report does not accurately reflect the state of the economy and that the economy is not recessing. Readers of our letters over the years can acknowledge our general caution regarding the strength of the U.S. economy. Still, pronounced variables had an outsized negative impact on the headline figure. First, negative contributions from net trade and inventories overwhelmed an otherwise strong sales to domestic purchasers figure. The final sales to domestic purchasers metric, in our opinion, is the essential input to the GDP formula. Consumption is paramount for the U.S. economy. Final sales to domestic purchasers grew at +2.6%, well above the previous period’s +1.7%. The growth indicates that consumer demand remains solid, thus keeping economic growth intact. Net trade was a material drag as weak exports (negatively affected by a global growth slowdown) were paired with robust imports (due to strengthening domestic demand) to subtract -3.2% from the headline GDP figure. Secondarily, business investment grew +9.2%, a significant improvement from the +2.9% increase in the prior period. Overall the headline figure was misleadingly negative; however, the report does continue to add fuel to our stagflation thesis for 2022.
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