What’s Dragging Down the Markets?
The see-saw in the markets continues. After down months in January and February we saw a bounceback in March, only to see the markets take a negative turn again in April. The economic areas in focus are still the same. Interest rates and inflation, supply chain issues and earnings and economic growth remain at the forefront; it’s the uncertainty around the three areas that is spooking the markets.
- The Federal Reserve is now talking about being more aggressive than previously discussed in their rate-raising and bond-tapering programs.
- Quarterly earnings started coming in over the past couple of weeks, and the results are mixed.
- China has recently gone into another COVID lockdown which may bring on more supply chain issues.
The Fed last week set the stage for the most aggressive rate-hike cycle in 30 years with Chairman Powell’s comments that a 50 basis point hike may be in the cards for May. The Fed has been behind the curve with rising inflation and the last thing they want to do is surprise the markets with a higher rate increase than what was projected.
To put it succinctly, the market doesn’t feel like the Fed has control over inflation. It’s similar to when someone applies for life insurance and has to fill out a questionnaire, part of it is the disclosing of anything going on with their health. They then take a medical exam, and finally the life insurance company comes back with a cost of a premium.
If you have high blood pressure, but you disclose that on the questionnaire and share how you and your doctor are treating it, the life insurance company looks at that more favorably than if it’s not disclosed and discovered during your exam. That’s the case, even if the two parties have the exact same readings. The life insurance company sees the person who disclosed it as having a handle on it.
But it wasn’t only Powell’s comments that spooked the markets. Other Fed officials, some who were previously viewed as a dove, are now coming out strong on the action needed to combat inflation. Fed Governor Lael Brainard, who has been nominated to the position of vice-chair of the Federal Reserve, helped send the yield on the 10 year Treasury higher and fueled the recent downturn in stocks. She said that inflation is much too high and subject to upside risks.
It’s of paramount importance to get inflation down. Fed Board Member Christopher Waller took Jerome Powell’s comments one step further and said there could be multiple 50 point hikes in the future. St. Louis Fed President James Bullard, probably the most hawkish of the Fed members, broached the idea of a 75 point rate hike.
Companies report their earnings every three months, and last week started the reporting season for the first quarter. So far, the earnings reported have been a mixed bag – especially in the tech space. Google’s earnings disappointed on its YouTube growth story, while Amazon’s earnings sales projections weren’t positive. Facebook’s earnings were well received, but that may be because their projections have been lowered. The companies that have been reporting the best earnings so far are ones that have pricing power like McDonalds.
COVID in China
While Dr. Fauci has declared the COVID pandemic is over in the US, China is taking a different approach and going into lockdown over a recent COVID outbreak. The lockdown is expected to have a big supply chain impact in the summer with some thinking it may be an even bigger mess than the supply chain issues of last year.
While all of these issues are worrying and testing the economy’s limits, many people still think the economy is on solid footing and are not predicting an imminent recession.