Equities Give Way To Fed Speak

By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group

Equities were under pressure late in the week as the multiple Fed governors floated a more aggressive stance toward rate hikes.  By Wednesday's market close last week, equities were slightly higher.  On Thursday and Friday, markets reacted negatively to the Fed's hawkish language.  In fact, on Friday, futures markets has priced in a 75 basis point hike (low probability) for the first time.  By this morning, that sentiment shifted and now only a 50 basis point rate hike is priced in for May's Fed meeting.

We are three weeks into earnings season and 20% of S&P 500 companies have reported 1st Quarter earnings.  So far, 79% have reported earnings above analysts’ estimates and 69% have reported revenues above estimates.  Companies beating 1st quarter earnings are above 5-year averages, but the magnitude of the positive surprises is below the 5-year average.  This is not to be unexpected as we forecasted lower earnings this year, especially in light of higher inflation and higher interest rates.

Concerns among investors now revolves around slowing growth due to rising inflation, rising interest rates, and changes in consumer behavior going forward.  While the supply-chain has seen some relief, overseas is not so much the case.  The ports at LA & Long Beach have seen a decline in the number of anchored ships waiting to be unloaded.  Overseas, extreme COVID lockdown measures in China are causing a logistics logjam with piled-up containers at key ports.  Exports are experiencing delayed dwelling time at the port of Shanghai.

Multiple Fed governors floated a 75 basis point rate hike in May versus the largely expected 50 basis point hike.  This is throwing off younger investors as those under 40 have not seen an environment of rising inflation and rising rates of this magnitude.  The mid-to-late 70s was the last time inflation and rates disrupted markets.  However, we have to keep in mind that inflation and rates are coming off significant lows.  Meanwhile, the economic data released last week showed moderate economic growth and a stable labor and housing market.  Building Permits and Housing Starts were higher than expected last week and higher month-over-month.  Initial Jobless Claims and Continued Claims were lower month-over-month.  Investors will be watching Big Tech earnings closely this week.