Weekly Market Commentary May 12th, 2022

The Markets

There is a lot of uncertainty in financial markets – and markets hate uncertainty.

In recent weeks, economic and financial market data have been telling different stories – and that makes it tough for investors to know where the economy is headed. Since stock markets move up and down based on what investors think will happen in the future, markets have been volatile. Here are some of the issues that have contributed to recent uncertainty.

• Is economic growth slowing? At the end of April, the advance estimate for gross domestic product (GDP), which is a measure of economic growth, showed the U.S. economy contracted (-1.4 percent, annualized) during the first quarter of 2022 (Canada hasn’t released Q1 GDP data yet). It was a puzzling piece of information because consumer spending, which accounts for more than two-thirds of economic activity, rose by 2.7 percent during the period – after being adjusted for inflation – which suggests the economy is strong. A discrepancy between imports (up) and exports (down) appeared to be the driver behind the decline in GDP. A contraction can be a sign that the economy is weakening.

• Is economic growth continuing? Right now, workers are in demand, which can be a sign of economic growth. Last week’s unemployment report showed stronger-than-expected jobs growth in April. The unemployment rate was 3.6 percent, and average hourly earnings rose by 5.5 percent, annualized. However, the labour force participation rate – the percentage of people who are working or actively looking for work (and thus being counted in the unemployment rate) – ticked lower. North of the border, the unemployment rate has fallen to 5.2 percent, and the labour force participation rate was 2.7 percent higher than in the U.S.

• Will central banks make a mistake? While we are still dealing with supply chain issues, in general, the economy recovered from the pandemic quicker than expected. One consequence was that high demand and limited supply pushed prices higher. Then inflation was exacerbated by the escalation in tensions in the near decade-long conflict between Russia and Ukraine, and the re-emergence of heavy-handed government restrictions in China.

Last week, the U.S. Federal Reserve continued its fight against inflation by raising the fed-funds target rate by 0.50 percent (The Bank of Canada has also recently raised rates). On Wednesday, investors welcomed the move and North American stock indices moved higher. On Thursday, they changed their minds and markets dropped lower. “[…] stocks appear to be on a permanent rollercoaster ride as investors debate continued signs of a strong economy alongside rising rates,” stated a source cited by Barron’s.

Bond yields have risen along with interest rates, in both the United States and Canada. Higher bond yields are likely to affect stock markets, too, as investors can now find opportunities to invest for income with less risk.

Last week, major North American stocks indices moved lower. The Nasdaq Composite Index is in bear market territory (down 20 percent or more), and the S&P 500 is down 14 percent year-to-date. The S&P/TSX Composite index has fared somewhat better, being currently down over 6 percent.

If you have any questions or concerns about current market conditions or your investment portfolio, please don’t hesitate to give us a call.

Source: FactSet

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