Rising Bond Yields and Interest Rate Expectations Weigh on Stocks
After a positive start to the week, rising interest rate expectations weighed on both stock and bond markets. We saw both global markets (represented by the MSCI All Country World Index) and domestic stocks (represented by the S&P 500 Index) down -2.7%.
Interest Rate Expectations and Volatility
It was once again rising interest rate expectations driving much of the volatility. In his public comments on Thursday, Fed Chair Jerome Powell indicated that it is increasingly likely that the Fed will raise its benchmark rate by .50% at the May meeting instead of a 0.25% increase. Given current inflation levels, it has become more likely that the Fed “frontloads” the interest rate increases, meaning that the next couple of increases are at 0.50% rather than spreading out smaller increases all year. For perspective, the 10-year Treasury bond yield was 1.5% coming into 2022 and sat at 2.9% as of Friday.
Economic Data News
In economic data news, the Purchasing Managers’ Index, which measures the expansion or contraction of the manufacturing and service sectors, came in at 55.1. A reading above 50 means that there is an expansion in economic activity, so overall a positive sign.
Much of the attention is focused on the Ukrainian conflict when discussing inflation. Another key area to keep an eye on is the lockdown in Shanghai. As part of its attempt to reign in COVID-19, China has remained firm in its approach of locking down major cities to slow the spread of the virus. Given the city being a major economic hub, these types of lockdowns will only hurt already struggling supply chains.
This will be another big week for corporate earnings. So far, S&P 500 company earnings reports have been strong and are on pace for an increase of 8.2% year-over-year. The focus for many investors is on profit margin given rising costs for businesses. Below is a graphic of profit margins over the last decade. While down from their peak, expected margins are still high and above the levels over the last decade.
I’d like to leave you with the final line we’ve used since we started these commentaries back at the very height of market volatility in March 2020. Always remember that we create financial/investment plans, not for the easy times, but to prepare for the tough ones.
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