In the May issue of our monthly flagship publication, we feature:
- On the Record by Chief Investment Officer Tony Roth explains that, after an extraordinarily volatile and disappointing stock market in April, we analyze the current economic and market forces at play and set our sights on May and beyond. First, we take an in-depth look at inflation expectations and supply-demand shifts against a dicey backdrop that includes a cloudy supply-chain outlook and COVID outbreaks anew in China. In assessing these risks, the outcome looks indeterminate. With that in mind, we prescribe patience as we work to determine whether, when—and to which asset class—cash should be deployed.
- In Focus by Head of Fixed Income Randy Vogel details how with equities highly valued and the Fed once again beginning to raise interest rates, income- and yield-thirsty investors are turning to beaten-up areas like bonds. But while this asset class has long been thought of as a safe haven, there’s an awful lot that investors should first know. What is the interplay of interest rates, inflation, and bond prices? What’s involved in navigating fixed income? We look at investment strategies to consider in a rising rate environment and the risks to keep in mind.
- Investment positioning and equities overview.
On behalf of the entire investment team at Wilmington Trust, I would like to welcome our new clients, formerly of People’s United Advisors, a part of People’s United Bank, to our monthly flagship publication.
I was fortunate enough to spend much of spring break with my wife and two daughters on a boat. Our family has a lot of experience sailing, so we feel very at home on the water, but I strangely developed an acute case of land sickness when I returned home. Was it the lack of rolling motion or instead the disorientation I experienced returning to a very different rate and markets environment from what I left behind just a week earlier?
A few days back at my desk and the Bloomberg terminal seemed to settle my vertigo, which turned out to be well justified, as April ended up being the worst month for the S&P 500 since the onset of the pandemic—as well as closing out the worst quarter for bonds in about four decades. The tech-heavy Nasdaq Composite returned its worst month since 2008, and through April, the index had corrected 23% from its all-time high. The carnage continued this week. First-quarter U.S. GDP contracted, and the Consumer Price Index (CPI) hit 8.5% on a year-over-year (y/y) basis. This is the closest the U.S. economy has come to stagflation since the 1970s.
Notwithstanding this raft of troubling data, we see the economy as reasonably healthy, based on the continuing strength of consumer and business spending alike. Moreover, given current dynamics, we expect inflation to decelerate sharply over the balance of this year. While this tempts us to take advantage of the market drawdowns to deploy cash back into equities, in our view this would be premature. There remain two exogenous risks—specifically the Ukrainian war and the Chinese zero-tolerance-COVID policy—either of which could act to quickly reaccelerate the path of global inflation.
Baseline expectation for inflation
We have been resolute—if not a bit early—in calling for a peaking of and gradual decline in inflationary pressures. This outlook has understandably been met with some skepticism, but as our Chief Economist Luke Tilley outlined in a recent Wilmington Wire post, we are seeing early signs that support this thesis on both the demand and supply sides of the equation.
- Demand. The runup in goods prices was driven largely by unprecedented consumer demand during the pandemic. This consumption was enabled by historic fiscal stimulus resulting in record excess savings. Those savings have dwindled for most households and are now lower than pre-COVID levels for those in lower-income tiers. While they remain elevated for the highest-income tier, at this level, excess cash has little impact on consumption. In addition, some measures of consumer sentiment are near the lowest on record, suggesting consumers will further slow spending on goods and services in future quarters. The housing market is also showing evidence of coming off the boil after the fastest increase (on a percent change basis) in the 30-year mortgage rate on record1.
- Supply. We are now seeing stockpiles at ports—outside of China—dissipating and shipping costs falling. Looking under these trends, we note that the tight labor markets that had contributed to logistical backlogs across the supply chain are now easing. We anticipate the combination of increasing labor participation and plateauing demand for workers to alleviate shortfalls within the supply chain.
1 As measured by 5-month change in the Bankrate.com 30-year fixed mortgage rate national average as of April 29, 2022 (Source: Bloomberg).Download Article