2022 has not been kind to capital markets through the first four months of the year. A combination of inflation, rising rates, the Fed, the war in Ukraine, and COVID-19 lock downs in China have posed headwinds throughout most of the year. April brought many of the same worries, as well as the kickoff to earnings season and a negative GDP data point, adding to an already volatile year. This perfect storm led the S&P 500 Index lower by about 8.7% last month and a year-to-date loss of 12.9%.
Many of the mentioned volatility-inducing factors are not new, such as rising rates putting negative pressure on high-growth stocks. Hence, value stocks are outperforming their growth counterparts so far this year. There is also the expectation that the Federal Reserve will be increasing the Federal Funds Rate by 0.5% at their meeting this week. While the expected amount has changed over time, it is well-known rates will be increasing throughout the year. However, a negative GDP point is a new element to add to the mix.
Economists expected U.S. GDP to grow by 1% annualized in the first quarter, well below the fourth quarter’s 6.9% growth but still positive. When the Bureau of Economic Analysis announced that first quarter growth declined 1.4%, it was a surprise. Like many recent data releases, the top line number does not always tell the whole story. Consumer spending drives about two-thirds of U.S. economic growth, and that did not change last quarter when the consumer added 2.7% to GDP. This even marked the third straight quarter the consumer growth increased. Businesses also had a strong quarter as they increased equipment purchases, as well as research and development investments.
Consumers and businesses were not the issues with first-quarter GDP, so what was? Primarily net exports, driven by the continued supply chain issues worldwide, led to the quarter’s overall negative GDP estimate.
While it is difficult to find positives from a negative GDP estimate, the domestic economy continues to be resilient, identified by consumer spending and business investment. The domestic economy is growing at 3.7%, well above the Fed’s long-term expectations of 1.8%. Therefore, no changes should be expected to the Fed’s rate hike outlook, at least for now.
The stock market beginning the year in the red is never what anyone wants to see. Still, since we are long-term investors, lower returns can mean better buying opportunities. Even if not actively contributing to your accounts, active portfolio managers are finding opportunities to buy quality companies at a lower price. While looking at statements in this environment is not ideal, drawdowns happen and can be a way to set your portfolio up for long-term success.
Author: Joe Clark, CFA | Research Team | Allegheny Financial Group | May 2022
The information included herein was obtained from sources which we believe reliable. This report is being provided for informational purposes only. It does not represent any specific investment and is not intended to be an offer of sale of any kind. Past performance is not a guarantee of future results.
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