Market Recap

 

We are all probably glad to close the book on April, at least from a market perspective. Almost all asset classes lost ground during the month, but some of the heaviest selling was in leaders of the last few years. The so-called FANG group of Facebook (now Meta), Amazon, Netflix, and Google were all sharply lower in April. Facebook lost -7%, Amazon roughly -25%, Netflix -47%, and Google -16%. Apple and NVDIA are sometimes thrown in to make the FAANNG index. These two were off -8% and -31% respectively in April.

 

If you look at the NASDAQ as a whole, it isn’t a pretty picture. Almost 50% of the NASDAQ components are down 50% from their highs, while roughly 20% are down more than 75%.

 

 

But while the growth indexes like the NASDAQ have taken a beating, value indexes are holding up relatively well. Through Thursday the large and mid-cap value indexes are off just -2.2% and -4.9% respectively YTD. The revenge of the old economy stocks persisted in April.

 

Slowing Growth versus Wage Pressures

 

There were three major economic reports this week that paint a mixed picture for the economy

 

Housing

 

The housing data is at something of a weird point in history. Naturally, the reports are backward looking and still show solid activity. For example, the S&P/Case-Shiller price index increased at a record pace in February (+20.2% year-over-year).

 

 

But this doesn’t reflect the recent spike in interest rates. Mortgage origination data has slowed significantly, and new homes sales were off -12.6% in March (but this is a very volatile index).

 

 

Housing almost certainly is slowing in most markets. Inventory levels locally appear to have spiked higher in the last couple/three weeks.

 

Consumer Spending versus Trade

 

The first estimate on GDP growth for 1Q22 surprised pretty much everyone. Real gross domestic product (GDP) contracted at a -1.4% annualized pace in Q1, disappointing expectations for about a +1.0% pace of expansion.

 

 

Now the details of the report aren’t as bad as they look. Consumer spending was solid during the quarter (private domestic demand was up +3.7%) and spending on capital investment was up a huge +9.2%. The big hit to growth came through foreign trade. Imports surged +17.7%, meaning much of the demand growth was met through imports, not domestic production. This alone subtracted -3.2% points from the headline GDP number.

 

This doesn’t feel like a recession report as underlying demand was robust. More of a commentary on screwed up supply chains/manufacturing processes.

 

Employment Costs

 

On Friday we got another inflation report and a read on wages. I won’t bore you with the inflation data – it was as expected. No surprises.

 

The surprise came through the wage report, though. The Employment cost index was up +1.4% (q/q) vs. the estimate of +1.1%. This doesn’t sound like much, but as you can see below, it’s the fastest pace of wage growth since the late 1990s.

 

 

And there’s no shock as to why wages are on the upswing. The precent of companies with at least one unfilled position stands close to all-time highs.

 

 

Market Implications

 

There’s nothing here to dissuade the Fed from hiking rates when they meet next week. A half point hike looks all but certain, as does the start of quantitative tightening. The only big questions are who dissents in favor of a 75bps hike, and what does the committee/Chairman say about future hikes?

 

From an investment strategy standpoint, there was nothing in the data to flip the narrative of value over growth. Underlying demand growth is decent and wages are growing. Combine this with continued supply problems (China lockdowns and Ukraine/Russia), and inflation is likely to run hot all year.

 

We used this chart a few months ago, but it still applies. During the secular bear market of 1969 to 1980 high valuation stocks languished while cheap value stocks prospered.

 

 

Until the macro backdrop changes this seems to be the gameplan for the rest of 2022.

 

Charts We Found Interesting

 

1. There are early hints that COVID cases are picking up again.

 

 

2. For all the angst over Netflix and Amazon’s earnings, the reporting season has actually been pretty decent so far. The percentage of companies beatings earnings estimates remains relatively high.

 

 

3. The route in the yen continued this week. The Bank of Japan surprised markets with a pledge to buy unlimited amounts of JGBs every business day if necessary. The decision conveyed an ironclad commitment to the bank’s 0.25% cap on 10-year yields (we covered the topic last week).

 

 

4. Macron won the election but the euro couldn’t get out of its own way. Will a disruption in gas supplies be the catalyst for the euro to trade at parity to the dollar?

 

 

5. The selling in the NASDAQ has been intense, but it still isn’t cheap at the index level.

 

 

6. If you look at financial market bubbles thoroughly history, they all have characteristics in common (Edward Chancellor, Charles Mackay, William Bernstein, and Charles Kindleberger have all written eloquently on the topic). One characteristic is how they burst. This overlays the Dot-Com bubble of 1999/2000 on the ARKK fund of recent history.

 

 

7. Not a good time to be in the mortgage business.

 

 

8. I know enough about Jervon’s paradox to be dangerous. But essentially, an increase in efficiency in resource use will actually lead to more consumption, not less. Coal is the unfortunate example. Despite transitioning away from coal in middle part of the last century, we use more than ever today on a global basis.

 

 

9. As I’m sure you know, we have a robot on Mars – the rover Perseverance. Just recently it photographed an eclipse of the Sun by Mars’s moon Phobos. Amazing!

 

 

 

 

Have a good weekend.

 

 

 

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