Macro Perspective

After a week when two retail bellwethers delivered their worst one-day returns since 1987 followed by the worst day for the S&P 500® in two years, investors may see few positive signs for markets. We continue to point to earnings as one of those, with consensus still expecting 10% growth for the year. In our view, concerns about the big picture — the path of the business cycle — require some investigation into the minutiae of last week’s events. Most companies were beating consensus estimates on revenues; it was the ability to retain profits and expand margins that was the challenge. We think this raises the question of whether company-specific issues are being applied to consumer health overall. The week ahead brings the annual World Economic Forum at Davos and remarks from a number of policy makers; their forward guidance on monetary policy may be critical for markets to find their footing. 

Equity Markets

After the longest losing streak since 2001, short-term technicals for U.S. equities remain fairly weak, in our view. The number of S&P 500 stocks below both their 50- and 200-day moving averages is at the lowest level since May 2020. For long-term investors, this also means valuations have fallen dramatically since the start of the year with the S&P 500 forward price/earnings ratio declining five points, back to levels not seen since early 2019.

Developed international markets ended a string of six weekly declines with every sector except Consumer Staples delivering positive returns. Investors look for clarity from central bank speeches in the week ahead as there are growing expectations the European Central Bank (ECB) could raise its policy rate by 50 basis points (bps) at its July meeting.

While most investors focused on the selloff in U.S. markets last week, the MSCI Emerging Markets Index had its strongest weekly return in two months. As we have been expecting, China’s central bank made a significant step to ease policy by lowering its five-year lending benchmark rate by 15 bps last week, its biggest decline on record. 

Fixed Income Markets

After jumping 100 bps in about 45 days, the 10-year Treasury has declined 36 bps in two weeks. We believe interest rates were moving rapidly higher in reaction to aggressive Federal Reserve (Fed) policy rather than as a reaction to strong economic data; the same is happening now. From Friday’s closing yield of 2.78% for the 10-year, its next level of resistance is 2.71%; if it were to fall below that, we would not view it as a signal of slowing growth expectations but rather a view that investors expect the Fed to relax aggressive monetary tightening. 

Chart of the Week

Last week saw the worst selloff in retail stocks relative to the S&P 500 since early 2021. As a result of notable earnings misses and guidance downgrades from companies such as Walmart Inc. and Target Corp., some investors are questioning if these consumer bellwethers are indicating heightened recession risks. We point to our business cycle analysis to express our views on this topic. For example, the monthly Conference Board U.S. Leading Economic Indicators Index for April came out last week, and its rolling six-month average posted a growth rate of 6.7%. Over the past 40 years there has never been a recession until that growth rate fell below zero, and with growth still at these high levels, it would take a significant collapse in economic activity in the second half of the year to bring about a recession. Yet, consensus estimates for 2022 earnings growth is 10% and we expect a number of economic data points to be reported in the week ahead that should suggest there is still plenty of runway left on the cycle despite a number of retailers facing near-term margin issues. 

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