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Stocks Struggle in The First Week of the Second Quarter
Key Takeaways
  • The S&P 500 closed at 4,488.46 down from 4,545.86 last Friday. Markets were spooked by yield curve inversions.
  • A chorus of activity from the Fed pointed to a more aggressive approach to tightening than many market participants assumed weighed on markets.
  • The prospects for a peace deal between Ukraine and Russia appear to be dimming. Russia is shifting troops to begin an offensive in the Eastern and Southern parts of the country.
  • Risks to the growth outlook will continue to mount the longer commodities and food prices remain elevated given the potential scale of an extended commodities disruption.

The market had a down week in the face of a hawkish tone from several Fed speeches and events that make it look like the bond market may have been more correct than some assumed. Of course, the Fed may be attempting to jawbone the market and it may not end up acting as aggressively as some fear. However, our Head of Global Portfolio Strategy Brian Rauscher has heard from trusted sources Powell has been made a genuine convert to the hawkish side. The hawks took him to the river and dipped him in, so to speak. Of course, the inner workings of the world’s most powerful central bank can be perplexing so only time will tell. If what looks like a persistent conflict in Ukraine continues to curtail growth and results in a further economic escalation of things like sanctions, they may have to change their tune. It was a risk-off week for sure. The defensive sectors of Health Care, Consumer Staples, Utilities and Real Estate were the clear leaders. The Energy sector was a gainer as well but had weaker relative gains. Industrials, Technology, and Consumer Discretionary all got slammed by more than 2%. So, markets are not happy that a very hawkish Fed might not only take the punch bowl away but try to physically break up the party like small-town cops. There was an op-ed from Former New York Fed Governor Bill Dudley that was contended the Fed will not be able to tighten financial conditions effectively without a severe drop in equity prices, which it must force if such a drop doesn’t occur on its own. The logic behind this argument is that the financial confidence households gain from high asset prices interferes with the Fed’s objective of slowing inflation. Our Head of Research, Tom Lee, will address this peculiar note in more detail below. While this could have been part of Powell’s messaging strategy, it may have also been Dudley simply speaking his mind. Fed officials still officially would like to have a soft-landing but hearing this tone from the Fed is generally not something markets like. The flattening of the Phillips-Curve has complicated how the Fed must approach monetary policy, but his conclusions probably are not shared by a majority of current Fed members.

 The thing is, there does appear to be some pressure boiling off the tea kettle with regards to inflation. Of course, we have multiple sources of episodic inflation that may be distorting how the data comes out. Nonetheless, the kind caused by elevated demand for goods over services associated with the pandemic seems to be slowing. The container shipping rates from Shanghai to Los Angeles, New York, and Rotterdam are all showing themselves to be beginning a downtrend.  Of course, the newest episode of inflation is caused by the grinding ground war in Ukraine and the associated Western sanctions on Russia. As Russian forces pulled out of the Kyiv area, they left behind appalling evidence of war crimes. The reason this is significant for inflationary outcomes is that if Russia’s wanton violence continues it could lead to a full-on European boycott of all Russian energy. Some believe this could push oil prices to $200 which would probably be high enough to start menacing consumer wallets on a large scale.

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