/perspectives/weekly-viewpoint/powell-seals-the-deal-for-50-basis-point-hike

Powell Seals the Deal for 50 Basis Point Hike

The major market indices finished the week lower as a solid kick-off to first quarter earnings season was outweighed by hawkish remarks from central bank officials.

April 25, 2022    |    By Michael Schwager

Performance for Week Ending 4.22.2022:

The Dow Jones Industrial Average (Dow) finished down 1.86%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) fell 3.11%, the Standard & Poor's 500 Index (S&P 500) slumped 2.75% and the Nasdaq Composite Index (NASDAQ) closed off 3.83%. Sector breadth was negative with 9 of the 11 S&P sector groups closing lower. The Telecomm sector (-7.74%) paced the decliners followed by Energy (-4.56%) and Materials (-3.72%). On the downside, both Real Estate (+1.24%) and Consumer Staples (+0.39%) finished in the green.

Index* Closing Price 4/22/2022 Percentage Change for Week Ending 4/22/2022 Year-to-Date Percentage Change Through 4/22/2022
Dow 33811.40 -1.86% -6.95%
Wilshire 5000 42808.73 -3.11% -11.66%
S&P 500 4271.78 -2.75% -10.37%
NASDAQ 12839.29 -3.83% -17.93%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 4/18/22 – 4/22/22

The major market indices finished the week lower as a solid kick-off to first quarter earnings season was outweighed by hawkish remarks from central bank officials. Fed Chairman Jerome Powell told a panel at the International Monetary Fund's spring meetings in Washington that there was a case for “front loading” rate hikes, adding that a 50 basis point move would be on the table for the May meeting and indicated similar rate rises could be warranted after that. A rate increase in May, following the Fed's decision to lift rates by a quarter percent last month, would mark the first time since 2006 that the central bank increased its policy rate at back-to-back meetings. A half-point increase would be the first such move since 2000. The Fed has indicated it will also formally announce plans at the May 3-4 meeting to begin shrinking its $9 trillion asset portfolio. Meanwhile, earlier in the week St. Louis Fed president James Bullard told an event in Washington that he wouldn't “rule out” a 75 basis point rate hike in any of the central bank's upcoming meetings, adding that he'd like to see faster moves from his colleagues in order to tamp-down the inflationary pressures building in the world's biggest economy. While not his “base case”, Bullard's comments nonetheless lifted bets on the Fed's policy path, with Bloomberg's World Interest rate Probability tool now pricing in a 100% chance of a 50 basis point increase at both the May and June meetings.

Beige Book Report: The latest release of the Beige Book report—which will be used as the playbook for the May 3 & 4 FOMC meeting—confirmed that economic activity continued to expand at a moderate pace since mid-February as the Omicron wave waned. Despite elevated inflation, persistent supply difficulties, and ongoing hiring challenges, all districts reported moderate or robust growth. The outlook for the economy over the next six months was clouded due to elevated uncertainty stemming from geopolitical tensions in Ukraine and rising prices that continue to squeeze margins for producers as demand maintained broad strength through the first quarter. Employment increased at a moderate pace since mid-February as labor demand remained strong, outstripping a severe shortfall in labor supply, though several districts reported some signs of a moderate improvement in worker availability. While wage growth also showed early signs of slowing, firms reported that stronger compensation has done little to ease widespread vacancies. Price pressures remained widespread in the latest reading as businesses noted steep increases in the costs of raw materials and transportation along with elevated labor costs. Pressures were most stark in the manufacturing sector, which has had to contend with a sharp rise in energy, metals, and agricultural commodity prices as a by-product of the ongoing war in Ukraine.

Tale of Two Halves? While the near-term outlook for the markets will remain clouded by the situation in Ukraine, elevated levels of inflation and a hawkish Federal Reserve, we think as we move forward fundamentals will ultimately outweigh fears. The US economy remains in good shape and the probability of a recession in the coming quarters remains low. Consumer balance sheets are strong and savings rates are still elevated by over $2 Trillion. Money market mutual have over $4.5 trillion in cash and corporate buyback activity is expected to remain strong. Covid cases have plunged and many areas around the country are dropping Covid related mandates. Supply chain issues are starting to ease. Importantly, the earnings environment remains solid with high single digit growth expect this year and next. If there has been a silver lining to the recent market weakness, it's been that valuation levels have moved lower with the S&P selling for just over 17x the 2023 estimate and 16x the 2024 estimates. While certainly not a cheap market, but much less expensive than we've seen in recent years.

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The Week Ahead: It will be a busy week on the data front, headlined by the Q1 GDP report. According to Bloomberg, the preliminary GDP reading is expected to decelerate to +1.0% from the previous reading of 6.9% for Q4 2021. Other reports of interest include; March Durable Goods Orders, April Consumer Confidence, March New Home Sales, Personal Income and Spending during March, and the final reading of the University of Michigan Consumer Sentiment during April. The earnings calendar will be very busy with 173 members of the S&P 500 Index scheduled to release results. The Fed speaking calendar will be nonexistent as Fed officials have entered into the traditional blackout period ahead of the upcoming FOMC meeting.

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.




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