Market Week: May 23, 2022

The week in review

  • Retail sales increased 0.90% m/m
  • Industrial production increased 1.1% m/m
  • Existing ho e sales decreased to 5,610K

The week ahead

  • Markit mfg. and services PMIs
  • Light vehicle sales
  • Personal income
  • PCE

Thought of the week
Equity markets have seen a volatile start to the year, with the S&P 500 down 19% from its early January peak. A sharp move higher in interest rates on the back of a more hawkish Federal Reserve has pressured valuations, and subsequently left the index trading in-line with pre-pandemic levels and below its 25 year average. The re-rating in valuations has been particularly acute across growth stocks, as more defensive value names have outperformed. Inflation should cool and lead the Federal Reserve to provide greater clarity on its outlook for monetary policy. This should translate into lower interest rate – and broader capital market – volatility. A narrower distribution of outcomes and continued
growth in earnings will allow equity markets to stabilize, and in time, begin moving higher. Furthermore, consumer sentiment is at recessionary levels, which has historically coincided with strong equity returns over the next 12 months. The chart of the week highlights the returns investors stand
to enjoy as the market moves back to its all-time highs; forward returns are looking far more attractive than was the case at the start of the year, even if new all-time highs are not set in the short term.

While painful, this year’s sell-off has created an opportunity for investors to rebalance portfolios and ensure they are appropriately positioned for the coming macro environment. At the same time, this higher volatility environment has supported stock pickers, with the greatest share of large cap core managers outperforming in more than a decade.

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