The market continues to be a topic of conversation and questions from our clients, understandably! Taking a look at the market this week, we have created an updated market commentary to help provide some insight as we hit the midpoint of Q2.
Consensus expectation was for U.S. GDP to grow approximately 1.5% annually, but the advance estimate (first of three reports from the U.S. BEA) showed that the U.S. economy contracted at an annualized rate of 1.4% for the first quarter. Consumer spending increased but was offset by decreased government consumption and increased imports. Core CPI (which excludes food and energy) increased at an annual rate of 6.2% through April; this represents a modest decrease from the annual rate of 6.5% reported for the year ending March 31. Inflation remains at its highest levels in the past 40 years. The job market continues to be strong as non-farm payrolls increased by 428,000, and the unemployment rate remained unchanged at 3.6%.
The Fed raised short-term borrowing rates by 0.25% in March. In an effort to combat high inflation, it again raised the federal funds rate by 0.50% at its May meeting, citing robust job gains and strong household and business spending. This is the largest rate increase in 22 years. The Fed signaled that additional rate increases of 0.50% remain on the table for their next two meetings and a forecasted federal funds rate of 1.9% at year-end 2022.
The Bloomberg Aggregate Bond Float Adjusted Index, a proxy for intermediate investment-grade bonds, lost 4.0% quarter-to-date through May 16, bringing the year-to-date decline to 9.7%. The U.S. Treasury yield curve shifted up and steepened (short- and intermediate-term bonds increasing more than long-term bonds) in the first quarter, bringing down bond prices. U.S. Treasury yields continue to increase, albeit to a lesser degree, in the second quarter, placing further pressure on bond prices. For comparison, the five-year treasury yield nearly doubled in the first quarter, moving from 1.27% to 2.42%, but only increased by 0.41% since March 31.
The U.S. stock market is down 11.4% quarter-to-date through May 16, running the year-to-date decline to 16.2%. Value stocks have outperformed growth stocks in the second quarter, continuing the trend experienced in the first quarter. S&P 500 companies reported a blended earnings growth rate of 9.1%. The market declines lowered the 12-month forward price-to-earnings ratio to 16.6x.4 International equities (developed and emerging markets) declined 9.6% thus far in the second quarter, but a similar amount to U.S. equities year-to-date (-15.2%).
Should you have any questions, please contact one of our consultants.