Article

May 2022 Perspective


May. 2, 2022

What's New

The volatility and uncertainty investors have experienced to start of 2022 continued all the way through the end of April, capped off by the Nasdaq’s 4.2% drop on Friday, and pushing the growth-oriented index into a bear market (defined as 20% or more below the all-time high).

Everyone is closely watching inflation as recent readings remained elevated. April’s Consumer Price Index (CPI) report showed a 1.2% month-to-month increase for March, and an 8.5% increase year-on-year. Although the numbers showed some deceleration, the Federal Reserve is still hinting at a more aggressive rate hike of 0.5% (compared to the 0.25% in March) at the next two meetings. This would be the first half-point increase since 2000, and the first time there have been hikes at consecutive meetings since 2006. The next meeting is scheduled for May 3rd/4th. For more on our views on the potential for peak-inflation and what the Federal Reserve will do next, see our in-depth analysis by Marc Bushallow, Manning & Napier’s Managing Director of Fixed Income.

US equities, per the S&P 500 Index, finished the month off 8.8% and are down roughly 13% year-to-date. It’s clear that investors are anxious, staring at a wall of worries that includes an accelerated pace of Fed rate hikes, elevated inflation, and concerning economic signals, all while also navigating a European war and ongoing supply chain hurdles.

In fixed income, the US 10-Year Treasury Note sold off as yields rose rapidly, finishing the month up over half of one percentage point to 2.89%. Yields and bond prices move inversely. Yield-curve inversion, short-term rates above long-term rates, remains a concern as the Fed pursues its tightening cycle.

Lastly and regarding the economy itself, the preliminary estimate of first quarter GDP showed economic growth as shrinking by a 1.4% seasonally-adjusted annualized rate, marking the first contraction since the pandemic. The negative quarterly growth is a bit of a technical anomaly though, in-part a cooling off after last year’s aggressive inventory rebuild, as well as widening trade deficits and other various pandemic-related factors. The labor market remains strong, and Fed expectations are still for positive aggregate GDP by the end of the year.

Our Perspective

Given the state of market and economic conditions, we have been gradually adjusting client portfolios and have made incremental moves to de-risk in our traditional, multi-asset class strategies, as our research team carefully tracks risk and monitors fundamentals.

We believe we are in a mid- to late-phase of the economic cycle, and during these stages, we are focused on companies with strong business qualities. Our view is that a recession is not imminent, yet we are cautious of risks that continue to build. Both our top-down and bottom-up analysts will continue to monitor all points to make decisions accordingly.

The Strategy Behind Selling Oil

Oil prices are sensitive to supply and demand imbalances, and they had been slowly recovering from 2020’s COVID-induced demand collapse until this year. Recently, the Russia-Ukraine war and subsequent economic sanctions are causing a non-fundamentally driven spike in oil prices.

Our Perspective

Anticipating the demand recovery, we capitalized on the oil price collapse in early 2020 and established a variety of positions in the energy sector. As prices began to recover, and as they began to reach and go beyond the marginal cost of supply, we trimmed those positions, following the disciplines of our Hurdle Rate strategy.

Read more about our decision in the blog, Oil: Why We Sold.

Our View
Economic Cycle Economic growth remains mostly unfazed, and the economy is moving later cycle with speed; many countries are now lapping their fiscal spending programs, causing the massive liquidity tailwinds to begin to dissipate
Stock Market US stock market volatility has dramatically picked back up with equities reaching correction territory in February; they remain well below all-time highs; valuations are still elevated and there are a variety of rising risks that warrant monitoring
Bond Market Interest rates have risen well of their lows reflecting shifting expectations on inflation, growth, and central bank policy; corporate and municipal bond credit spreads remain historically tight
Foreign Exchange While we believe the dollar may weaken longer-term, in the short-term, it is difficult to make the argument that currencies will swing significantly; the rise in geopolitical tensions has only increased uncertainty or made the environment less clear in the near- or medium-term
Important Issues on the Radar COVID-19: the worst of this economic crisis is behind us, and with multiple waves of the virus, including the Omicron variant, the attention is shifting to learning how to live with the virus; potentially impacting recovery, financial markets and currencies regionally
Ukraine-Russia War: we believe an environment of elevated geopolitical risks over the coming months would entail a general risk-off environment; lending upward support to the dollar, gold, and commodity prices
China’s Economy: China is an outlier regarding policy and has shifted to a gradual loosening stance while most of the developed world begins to tighten; debt and property markets remain major issues; trade tensions continue to impact global trade and supply chains
Inflation: a confluence of massive policy stimulus, tight labor markets, gummed-up supply chains, and rising energy costs are causing inflationary forces to broaden and become more entrenched than previously expected; conflict in Ukraine and lockdowns in China have added to price pressures

Sources: Federal Reserve, Wall Street Journal, Refinitiv.

All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

This newsletter may contain factual business information concerning Manning & Napier, Inc. and is not intended for the use of investors or potential investors in Manning & Napier, Inc. It is not an offer to sell securities and it is not soliciting an offer to buy any securities of Manning & Napier, Inc.
The NASDAQ Composite Index is a broad-based capitalization-weighted index of domestic and international based common type stocks listed in all three NASDAQ tiers: Global Select, Global Market and Capital Market.
The NASDAQ Composite includes over 3,000 companies. The Index returns do not reflect any fees or expenses. Index returns provided by Wall Street Journal.
The S&P 500 Index is an unmanaged, capitalization-weighted measure comprised of 500 leading U.S. companies to gauge U.S. large cap equities. The Index returns do not reflect any fees or expenses. Dividends are accounted for on a monthly basis. Index returns provided by Refinitiv. Index data referenced herein is the property of S&P Dow Jones Indices LLC, a division of S&P Global Inc., its affiliates (“S&P”) and/or its third party suppliers and has been licensed for use by Manning & Napier. S&P and its third party suppliers accept no liability in connection with its use. Data provided is not a representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and none of these parties shall have any liability for any errors, omissions, or interruptions of any index or the data included therein. For additional disclosure information, please see: https://go.manning-napier.com/benchmark-provisions

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