Market Commentary


Monthly Financial Markets Commentary — May 1, 2022

Stocks and bonds tanked in April, as market participants are coming to grips with the full impact of the Federal Reserve Bank's expressed intention to vanquish inflation. A 50 basis-point increase is all but baked into the next two Fed rate increases. An oft expressed rationale for stocks and bonds negative reaction to increasing interest rates is that "investors discount future cash flows at a higher rate". In reality it may be something much more prosaic. Fixed income investments such as investment-grade corporate bonds and municipal bonds are beginning to offer yields that are competitive with stocks, and the notion that there is no alternative to stocks ("TINA") may be on its way to the trash heap.

For 2022 the S&P 500 Index, the capitalization-weighted broadest measure of U.S. stock market performance, has returned -12..95%. The Nasdaq Composite Index, another capitalization-weighted index, but more reflective of growth stocks, has returned -21.11%. Finally, the Dow Jones Industrial Average, a price-weighted index, has returned -8.52%. All returns include dividends. Volatility in the markets has soared, with the VIX or "Fear Index" occupying record territory for a good share of the month. Companies have been severely punished upon issuing bad news and have soared on providing good news; likewise, 2% upward moves in the market have been followed by 2% downward moves the next day. This choppiness is not a sign of a healthy market and is indicative of extreme investor skittishness.

The Barclay's U.S. Aggregate Bond Index, a broad measure of the U.S. bond market, has returned -9.43% for the year. This is after declining 1.77% in 2021. The yield on the 10-Year Treasury Note, the so-called "risk-free" rate, jumped to nearly 3% during the month. Even with these declines, the entire complex of fixed income investments has negative real yields and projected returns, given inflation expectations. With the exception of some inflation-protected bonds and bank loan funds all fixed income investments are negative for the year.

The sectors in the equity market that have performed the best in 2022 are Energy, Utilities and Consumer Staples at 38.9%, 2.2% and 3.1%, respectively. Consumer Discretionary, Financials and Information Technology have fared the worst at -16.1%, -8.7% and -15.4%, respectively. The concentration of the major averages in a very select group of high-tech and other favored stocks remains true in the current year just as in prior years. There clearly has been a rotation out of certain high-tech stocks perceived as "safe" into other stocks that have gained favor, such as consumer staples. One has to wonder how long this will last.

The comparison of current price/earnings ratios and dividend yields as of May 1, 2022 to those of the prior year is as follows.

Index

Current*

Prior Year*

S&P 500

Price/Earnings

24.14

39.76

Dividend Yield (%)

1.46

1.37

Dow Jones Industrial Average

Price/Earnings

18.98

29.25

Dividend Yield (%)

2.15

1.76

* based on 12-month trailing data

Current national average CD deposit yields for one-year, two-year and three-year instruments are 1.25%, 1.65% and 1.95%, respectively. This class of investments is beginning to offer some competitive yields.

Gold and crude oil most recently traded at $1,942.80 and $102.95, respectively, compared to $1,734.25 and $61.25 one year earlier. Crude oil rose to over $125 a barrel earlier in the year in response to the Ukraine conflict but has since settled back to a level of about $100 per barrel. The fundamentals with respect to commodities would appear to be strong in that both short and long-term supplies appear to be constrained. On the other hand, there is a developing concern that the world economy may be headed for a recession, given the actions of the Fed and other central banks. Gold remains positive for the year, clearly besting stock and bond market returns. As long as the real rate of return on bonds remains negative there will be upward pressure on gold. One might view it as the market's collective judgement that the Fed may remain "behind the curve" in fighting inflation, notwithstanding its expressed intention to bring it down to acceptable levels.