T.S. Elliot begins his epic poem, The Wasteland, with those memorable words. He wrote that line exactly 100 years ago, not knowing how well it would describe April of 2022.
This past April, we believe, was the “Cruelest Month” for investors. It was a microcosm of the uncertainty and fear permeating the markets, a witches’ brew of inflation, investor apathy, reduced consumer spending, extreme volatility, nervous CEOs, and the Fed walking a tightrope between creating a recession or stoking inflation. The U.S. economy and the markets experienced declines in April that have not been seen in decades:
• Dow Jones was down 4.2%
• S&P 500 lost 7.8%
• Russell 2000 was down 9.03%
• NASDAQ lost 12.2%, its worst month since 2008;
• Russell 3000 Growth Index declined more than 12%;
• Russell 2000 Growth Index fell more than 12%;
• Price To Earnings ratios compressed substantially;
• The Ten-Year T-note approached 3%;
The Fed To The Rescue
Chairman Powell decisively and emphatically responded to inflation concerns on May 4 when the Fed raised interest rates by 0.50% in an effort to subdue the worst inflation in forty years.
Powell’s presentation was one of the few times he addressed the American public directly, expressing an understanding and sympathy to their frustrations and difficulties: “Inflation is much too high and we understand the hardship it is causing. We are moving expeditiously to bring it back down … We have both the tools we need and the resolve it will take to restore price stability.” It was a moment of conviction to bring down inflation that we have not heard from the Fed during the past two years. Powell did not try to divert responsibility for controlling inflation; it is clearly the Fed’s challenge.
The markets feared a 0.75% increase, which may have resulted in a serious tightening for businesses. Powell removed that uncertainty by strongly implying, without formally committing himself, that the next two rate hikes will be 0.50%. The Chairman introduced a new word into Fed-speak: “adapting.” He used that term to describe future Fed action, which seems to indicate flexibility in policy and a willingness to adjust to changing economic conditions.
At this time, we believe the Fed’s interest rates at the end of the year will be 3%. The landing may have a bump or two, but the face masks will not be dropped.
The Markets Are Not The Economy
Investors often use these two words as interchangeable. They are not. Despite a cruel April, there are many indications that the economy is robust. People who want to work are working. Recessions do not occur when people are employed. The percentage of S&P 500 companies beating EPS estimates is above the five-year average, although at a lower rate. The Institute for Supply Management manufacturing index shows a slowing rate compared to last year but is still expanding. Supply chain shortages should improve in the second half. Consumers are still spending, and many corporate CEOs believe their organizations are doing well.
Much, but certainly not all, of the fluff has been removed from valuations. The market is reflecting value more than it has in the recent past. The Fed is committed to bring down inflation without causing financial distress in the general economy, and we think they offered a realistic plan.It is not time to break out the bubbly, but perhaps it can be chilled. After Powell’s remarks all major indices shot up, which suggests that investors like the Fed’s plans for the future.
