Market wrap: Stock markets slip on wild week

Sentiment swings driven by rising rates

The major North American stock market indexes posted some major swings this past week, as the U.S. Federal Reserve Board announced a half-percentage-point increase in the trend-setting federal funds rate, to between 0.75% and 1.0%, which propelled the yield on the benchmark U.S. 10-year Treasury bond above 3.0%. In its statement, the Federal Open Market Committee said that it “anticipates that ongoing increases in the target range will be appropriate,” and did not reveal plans for future rate hikes. However, most analysts believe the Fed will continue aggressively raising rates to curtail persistently high U.S. inflation rates (8.5% year-over-year in March).

Central banks are now walking a tightrope, hoping to stanch inflation without plunging economies into a recession (generally, two consecutive quarters of shrinking economic activity). Given that central bankers sing from the same choir book (recall how all of them swore that the spike in inflation following their massive money printing mania through the pandemic was “transitory”) many observers are skeptical that they will be able to engineer as so-called “soft landing” by which inflation is wrestled back to a 2% annual rate while economic growth is not unduly hampered.

Despite these dire warnings, job growth continues in both the U.S. and Canada. The U.S. labor market added a solid 482,000 new jobs in April, while the unemployment rate stayed steady at 3.6% and average hourly earnings crept upwards. In Canada, 15,000 jobs were created in April, considerably less than the consensus forecast of 40,000 or more, while the unemployment rate stood at 5.2%, and average hourly wages rose 3.4%. With a relatively strong economic growth underpinning, the Bank of Canada likely has enough flexibility for another rate hike or two in the months ahead.

Rising interest rates have a sharp impact on share prices as higher bond yields make equity investments less attractive, particularly in the riskier growth sectors of the market, such as information technology. Moreover, higher rates also affect borrowing costs for businesses, dampening future earnings prospects, leading to a revaluing of share prices in many sectors.

All of the big indexes ticked down on the week as volatility once again prevailed as investors weighed the effects of inflation, rate hikes, the Russian invasion of Ukraine and attendant macro disruptions, and China’s Covid lockdowns and attendant supply-chain disruptions.

The struggle for price discovery based on revised forward earnings estimates saw the blue-chip S&P 500 Composite Index see-saw its way to a 0.2% loss on the week, with the energy sector (ahead 10%) the only shining light in an otherwise uninspiring market. The more growth-oriented Nasdaq Composite Index similarly lost ground, dropping 1.5% on the week. Toronto’s benchmark S&P/TSX Composite Index retreated 0.6% on the week, despite strong showing from the energy and financial sectors, with crude oil gaining 6.2% on the week. But this was not enough to overcome steep losses in most other sectors, notably healthcare, information technology, and consumer discretionary. Crisis-hedge gold remained calm, eroding 0.7% on the week for a only a modest 1.5% gain year to date.

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Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.