Markets stage impressive bounce as focus shifts from inflation to growth

Thoughts

• Equity markets seek to continue their impressive bounce from oversold conditions, following a gain for the S&P 500® Index for just the second time in 12 weeks. Volatility remains intense, with three consecutive weeks with 5% directional moves for the first time since the early stages of the pandemic. The focus of investors has subtly shifted from inflation to growth concerns as the Fed aggressively removes accommodation. The second quarter ends Thursday, with the S&P 500 on pace for a loss of nearly 14% and the Bloomberg US Aggregate Bond Index losing 6%.
• Investor sentiment remains remarkably pessimistic, with the Bank of America Bull & Bear indicator remaining at a “maximum bearish level” of 0, a level only seen in 2002, 2008, and 2011. Institutional investors are cautiously positioned, with a Goldman Sachs note stating that mutual funds are sitting on well over $200 billion currently. Pension rebalancing is likely to cause $30 billion in buying around quarter-end. Retail investors sold equities for the first time in seven weeks, with $16.8 billion in outflows.
• The bounce from the bear market lows is a welcome change, though slowing economic growth and lack of capitulation among investors has many skeptical of the durability of the recovery.

News

• Economic growth expectations continue to moderate, with the International Monetary Fund cutting its forecast for growth in the U.S. to 2.9% from 3.7% this year and to 1.7% from 2.3% next year. The group does believe the U.S. will “narrowly avoid a recession,” as the aggressive Federal Reserve tightening will reduce inflation and allow sustained economic growth. The University of Michigan’s reading on consumer sentiment fell to a record low at 50.0, with weakness in current conditions and expectations. Inflation remains the primary pain point for consumers, with 47% blaming inflation for impacting their living standards.
• The leaders from the G7 are meeting in Germany, with the Russia/Ukraine conflict a primary topic of conversation. A declaration was adopted that pledges support for Ukraine “for as long as it takes.” The group will discuss additional sanctions on Russia, including a price cap on Russian oil while allowing continued purchases. There will also be discussions on the Iranian nuclear deal, which could lead to more Iranian oil sales. France is also pushing for a deal that would allow Venezuelan oil back on the market. Russia will see its first foreign bond default in a century, as the grace period on $100 million in missed payments expired on Sunday.
• Earning season is weeks away, with bulls pointing to continued positive estimate revisions as a primary reason for optimism. Estimates for the full year reflect growth of more than 10% this year, with the estimate 3% higher than the beginning of the year. The second quarter is forecast at 5%, which would be the slowest growth in six quarters and down from 10% in the first quarter. Revenues are expected to grow at 10%, which suggests that margins will compress.

What to Watch

• This week could see elevated volatility as investors position around quarter-end. Economic data are plentiful, including durable goods and pending home sales on Monday, consumer confidence on Tuesday, revised first-quarter GDP on Wednesday, the PCE deflator (inflation metric preferred by the Fed), personal income and spending on Thursday, and ISM data on Friday.