The Dow (-1.8%), NASDAQ (-3.8%), and S&P 500 (-2.1%) all fell again for a third consecutive week. Taxable bonds declined 0.2% - 1.0%, and tax-free municipal bonds fell 1.0% - 2.0% as they continue their declines for the year. While returns started off strong last week, that changed on Thursday when the Federal Reserve (Fed) announced that it will be accelerating the pace of its interest rate hikes and that they will likely be raising rates by 50 basis points in their May meeting; the prior rate hike in March was only 25 basis points. Rising interest rates have an adverse impact on longer duration bonds as well as high Price-to-Earnings (P/E) stocks, which is why we are seeing both bonds and NASDAQ face heavy losses so far in 2022.
While core inflation, which subtracts volatile food and energy costs, rose 6.5% year over year which is its highest since August of 1982, While the metric rose just 0.3% in March, which was less than expectations. This suggests that inflation may be in the process of peaking and hopefully starting to decline in the coming months. The New York Fed reported that its Empire State manufacturing activity jumped to a four month high +24.6, with anything greater than 0 indicating expansion. New Orders and Shipments also surged last week, however Prices Paid rose to its highest level on record. This signals that the economy is expanding and strong, but inflation is remaining the key factor in stifling the markets.
As we continue through the midst of Q1 earnings season, many companies are focusing on their margins. While many companies are beating their earnings estimates, inflation and increased wages are eating into their profits. So far, 20% of S&P 500 companies have reported Q1 earnings with a blended growth rate of 6.5%. While earnings growth is the slowest since Q4 2020, the beat rate is 78.6% which is higher than Q4 2021.
he views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.