April 2022 U.S. Market Update
U.S. Market Update – April 2022
Christopher Gerber, CFA
ECONOMIC GROWTH
During the first quarter of 2022, the U.S. Economy contracted at a 1.4% annual rate after inflation. As usual, when the going gets tough the American consumer goes on a buying spree. Consumer spending increased at a 2.7% annual rate in Q1. Going forward may be a bit slower.
The Purchasing Manager’s Index often anticipates increased sales. It shows raw material buying in anticipation of increasing sales. Our PMI in April dropped about 4.5% from March to April. Consider this good-sized, but also consider it during major uncertainty. Interestingly, several key economic variables look strong.
JOBS
The March unemployment rate dropped to 3.6% from 3.8%, while the labor force participation rate (people available to work) ticked up to 62.4% from 62.3%. These are good numbers. Importantly, the Department of Labor defines employment as working one hour in a month. We also see wages increasing. Overall, these data show how employers need workers. Also, of note, the year-over-year gain in wages hit a recovery high of 5.6% in April, 2022. This increased competition for wages should inspire confidence in our domestic economy.
The chart below shows how much employers need workers. Job openings are up. Quits are up, likely due to workers moving to better jobs. Layoffs are way down.
EARNINGS
Through April, 2022, 72% of S&P 500 companies exceeded earnings expectations and 59% have exceeded revenue expectations. This is amid disruptions like Omicron, inflation, supply chain, stronger dollar (hurts international sales) and high commodity prices (resulting from supply chain and war). The chart shows how companies are making most of their profits are from margin (markup). This is a sign of strength. Margin shows the lack of cheaper substitutes consumers have access to.
INFLATION & RATES
Inflation is a big issue. Inflationary pressures persist from demand outstripping supply. Employment is high. The Fed will tighten more if necessary.
During April, the Fed increased the Fed Funds target rate by one-half percent. There are likely increases to come. Also, the Federal Open Market Committee (FOMC) within the Federal Reserve held up longer-term bond prices during the 2009-2019 bull market (keeping longer-term rates low), and again during the COVID-19 outbreak in 2020. This “quantitative easing” (QE) program has ended, and the Fed is now selling its treasury holdings quickly, flooding the market, dropping prices, and increasing yields. The Fed has revised inflation expectations upward and GDP expectations downward for 2022. Considering national Fed Governors’ average expected rate increases at seven in 2022, the pace of economic activity may slow.
UKRAINE
The war has dramatically increased commodity prices worldwide. The U.S. is in a reasonably advantageous position in some areas. Energy is one. U.S. consumers spend about 4% of their earned income on energy, lower than most other developed countries. This percentage is increasing due to higher costs, however. Going to the pump, paying energy bills, or buying food are shocks to the system. There are calls for more domestic energy production. There are calls for less in favor of renewables. Renewable energy as a major portion of global consumption is years away, plus it consumes energy to manufacture. Meanwhile, energy runs the world and Russia supplies a notable percentage of it. Expensive energy and China’s zero virus growth policy with its shutdowns will slow world economic growth. There is no way around it. At least having a large energy industry in the US will keep most profits resulting from increased worldwide prices here. They may ultimately fund greater economic growth and jobs at home. The charts below show domestic energy spending and domestic oil net imports.
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