Developments Over the Last Month


April showers doused bullish sentiment last week as the SPX wrapped up April with an 8.8% decline. This was the worst April return for the index since 1970 and the fourth lowest April return on record. Fear over this week’s FOMC meeting, mixed earnings reports, rising interest rates, and inflation anxiety kept buyers at bay. Economic data didn’t help as headline GDP unexpectedly contracted and consumer confidence faded. Outside of the U.S., China ramped up stimulus efforts with an ‘all out’ pledge to boost infrastructure spending to combat their contracting economy (April PMIs dropped to multi-year lows last week). The greenback also made headlines as the US Dollar index climbed to its highest level since ’02. 



What Drove This Month’s Performance?


The S&P 500 just suffered its 3rd worst monthly performance in the past 10 years, led by the Tech sector which had its worst month since 2008. US equities are~14% of its record high in December. Value was a clear winner, with quality again being shunned. Higher treasury yields helped underwrite dividend yield as a factor and dividend income funds. There was a sharp liquidation of $28B from equity funds overall in contrast to March. A recurring theme of late is that companies with more domestic exposure have outperformed those with more international exposure. 


Stocks Always Leads Bad News


Highly-valued stocks have been trading terribly since last fall, they were warning of bad news to come. First were the high multiple stocks getting kicked around in November and December as they sniffed out the Fed’s aggressive pivot on policy in January. Now, they are figuring out that Q1 may be the last good quarter of earnings as higher costs and increased recession risks weigh on future growth.


America Always Exports Recessions, It Never Imports Them


While tensions between Russia and Ukraine have been rising for years, the current military action is creating concerns about the potential impact on financial markets and the global economy. Fortunately, however, history shows that while geopolitical crises such as the one between Russia and Ukraine can temporarily roil markets, they don’t typically have long-term consequences for investors – the market has had a few rallies since the invasion. In general, these types of crises tend to only have a significant and lasting impact on global financial markets if they have a sustained macroeconomic impact on major economies. While Russia’s economy ranks as the world’s 11th largest, according to the IMF, at only 1/20th the size of the US and 1/15th the size of China, it is likely not big enough by itself to affect global markets or economic growth, even if it were to suffer significant economic damage as a result of sanctions or other measures taken against it by the US and Europe.


Bonds Not Hedging Stocks


We believe that fixed income has offered no hedge to the equity drawdown this year – in fact, the S&P 500 outperformed fixed income in the first quarter. This was the first ever market correction in the QE regime where bond yields have gone up, not down. There’s been 6 major drawdowns over the last 13 years, in every one of them, yields have roughly declined by 100bps on average during the drawdown – that has not been the case this time. 


Rate Hikes


The Fed is expected to hike rates by 50-bps on Wednesday, we think another 50-bps hike is in the cards for June, but after that the outlook is bit cloudier. The market has fully priced-in 10 rates hikes in 2022 (to the 2.50-2.75% range) and one more in 2023 which would be the fasted pace of hikes since 1989. We expect Powell’s tone to remain hawkish at the press conference and the Fed will also announce the start of QT as planned. Finally, financial conditions have already tightened significantly, for example the pop in mortgage rates is harming housing affordability and with further Fed tightening there will be more casualties to slow the economy further.


Earnings Highlights


Overall, 2022 consensus EPS are up modestly, but what is most noteworthy is how this earnings trend has skewed between indexes with small cap and value indexes seeing much more significant positive earnings revisions, while growth and larger cap indexes, more negative. While consensus 2022 EPS rose 1% since April 1, it was entirely driven by Energy (-0.2% ex-Energy).


Yield Curve Flattening & What It’s Telling Investors


The yield curve’s flattening is a sign of growing concern that the Fed is going to hike too much and break something. The curve inverted this past month, which would signal the market believes things are already breaking. As the short end of the curve rises, so too do the odds of rate hikes. The market has ten (10) rate hikes priced in by the end of 2022. 




2022 S&P 500 operating earnings = $223. 2023 = $235. 2021 = $209. 2020 = $142. 2019 = $165. 




S&P 500 Fwd. P/E is at 18.0x. EAFE is 13.0x forward P/E, while EM is at 11.2x. Russell 1000 Value is 14.4x v. Russell 1000 Growth at 23.5x, with Russell 2000 at 12.5x 


Talking Points


  • Yield Curve: The yield curve officially inverted at the end of March. an inversion of the 10/2 spread does not mean a recession is imminent. Historically speaking, stocks rally for about a year after a 10s-2s inversion, with an average return around 15% (heads up, this is a different range than shown in a below chart). So, a curve inversion is not a reason to sell—it’s a signal that the time on the bull market and economic expansion is now limited, and to prepare for both to end.
  • Build Back Better: Though it wasn’t passed in 2021, President Biden outlined the biggest expansion of the federal government matched with the largest tax increase since 1968. Biden senses the post-COVID era is a once-in-a-generation opportunity to massively restructure US fiscal, monetary, and social policy. In our opinion, this is a big experiment. We’ll wait to see how the Build Back Better plan and taxes pan out. It appears that this dramatic change in societal direction has proved to be difficult for some moderate Democrats to get on board, i.e., Manchin.
  • We feel it will be worth watching the general trend of economic and fundamental data, and when it will begin to decelerate.
  • Longer-term, we believe valuations and bond yields will eventually matter, and both will lower expected returns for balanced portfolios.





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The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

The Nasdaq Composite Index measures all Nasdaq domestic and international based common type stocks listed on The Nasdaq Stock Market. To be eligible for inclusion in the Index, the security’s U.S. listing must be exclusively on The Nasdaq Stock Market (unless the security was dually listed on another U.S. market prior to January 1, 2004 and has continuously maintained such listing). The security types eligible for the Index include common stocks, ordinary shares, ADRs, shares of beneficial interest or limited partnership interests and tracking stocks. Security types not included in the Index are closed-end funds, convertible debentures, exchange traded funds, preferred stocks, rights, warrants, units and other derivative securities.

The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.

The Russell 2000® Index measures the performance of the small-cap segment of the US equity universe. The Russell 2000® Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000® is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.

The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries*around the world, excluding the US and Canada. With 902 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The MSCI Emerging Markets Index captures large and mid-cap representation across 26 Emerging Markets (EM) countries*. With 1,387 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

Investment-grade Bond (or High-grade Bond) are believed to have a lower risk of default and receive higher ratings by the credit rating agencies. These bonds tend to be issued at lower yields than less creditworthy bonds.

Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

Nasdaq-100® includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.

The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. This includes Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and collateralized mortgage-backed securities. ACA-2205-2.