A look at the market through a half full glass

Investors are becoming more fearful as we progress into the year.  After falling by 5.6% in the first quarter, the S&P 500 is down double that amount so far in the current quarter.  That puts the broadest of the US equity indices off 16.1% so far this year and there is a good chance that we see some further losses before the stock market sell-off bottoms.  This is because the market is going through a pretty significant adjustment process at the moment.  

After nearly 15 years of experimental extraordinary accommodative monetary policy, the Federal Reserve is finally talking tough and appears to be very hawkish as it plans a lot of tightening for this year.  That has created an enormous amount of anxiety in the market and a re-rating of stocks.  However, in the midst of the current concerns and fears we are still able to identify a number of positive takeaways that provide some optimism for the months ahead.

One positive it that beyond the human perspective, which is tragic and horrifying, the war in Ukraine has so far avoided having more countries enter the conflict.  Moreover, just as the energy crisis of the 1970s encouraged the United States to seek energy independence, this situation seems to be encouraging Europe to find alternative sources of energy that enable it to no longer rely on Russia.  This in itself should stimulate investment in renewable energy infrastructure across the continent.  In addition, this conflict has obviously helped revive the importance of NATO and has, in at least some ways, united the European Union.  

Earnings have also been relatively good lately, given the challenging environment we are in.  With 91% of S&P 500 Index companies having reported thus far, 77% have reported a positive earnings surprise and 74% have reported a positive revenue surprise.  Admittedly, the energy sector has played a big role in these numbers, but most other sectors are also experiencing positive, if modest, earnings growth.  Moreover, calendar year 2022 earnings growth forecast for the S&P 500 have actually improved in recent week – now expected to be 10.1% versus 9.9% as of March 31.  Furthermore, Europe’s earnings season has also been quite positive thus far, despite the headwinds from supply chain disruptions and higher input costs.

Another source of volatility for the markets in the past few months has been China’s zero-tolerance Covid-19 policy.  Lockdowns in major cities like Shenzhen and Shanghai have shuttered factories and stores and resulted in a drastic decline in exports.  China’s exports rose 3.9% in April year-over-year, a sharp fall from the 14.7% growth rate posted a month earlier.  However, while Covid related lockdowns in China have certainly negatively impacted the economy, recent figures show that this could be a short-lived problem.  Data last week has shown a sharp decline in the number of cases in cities like Shanghai and Beijing which reinforce the argument that infection rates should decline dramatically by mid-summer.  This suggests a strong rebound in the second half of the year is still possible, especially with the promise of substantial fiscal and monetary stimulus. 

On the topic of central bank tightening, we should expect a few 50 basis points hikes by the Federal Reserve in relatively close succession over the next couple of months.  However, beyond that, we expect the central bank to make another pivot and get a bit more dovish.  First of all, longer-term inflation expectations remain relatively well-anchored, which should give the Fed confidence to take a more thoughtful, data-dependent approach to tightening.  As such, after it does some front-loading of rate hikes, we expect inflation to start moderating, even though it would remain relatively high compared to the Fed’s 2% target.

Finally, global stocks have been beaten down globally, which means this could be an attractive entry point for those with long-term time horizons.  While we should brace for continued volatility and the potential for more stock market downdrafts, this is the type of environment that provides opportunities for active management.  As such, those with long-term horizons should not be frightened by current market gyrations.  Diversification and remaining invested does not work every day, but historically it has helped people achieve their goals over the long run.

Disclaimer: This article was written by Stephen Borg, Head of Private Clients at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.