Global equity markets continued to face downward pressure this week with Wednesday marking the biggest one-day decline for the S&P 500 since June 2020. Recession fears and earnings releases from U.S. retail giants including Walmart and Target which both reported lower-than-expected operating margins because of higher inflation, drove markets lower. At its low point on Friday, the S&P 500 Index was down roughly 20.9% from its January intraday high, exceeding the 20% threshold for a bear market and placing it back at levels last seen in February 2021.

Comments from Federal Reserve officials also did little to calm inflation and interest rate fears. On Wednesday, Fed Chair Jerome Powell said the Fed won’t hesitate to raise rates above neutral if need be and warned that tightening could bring discomfort. He called price stability the bedrock of the economy and told the WSJ the Fed will push until inflation falls “in a clear and convincing way.” He repeated guidance projecting 50-bp hikes in June and July and added, “there could be some pain involved.” Chicago Fed chief Charles Evans added to the hawkish tone, saying front-loading hikes is needed for tightening of financial conditions “as well as for demonstrating our commitment to restrain inflation.”

Economic data releases throughout the week provided mixed signals regarding a slowdown in the U.S. economy. Despite the highest inflation in decades, retail sales indicate U.S. consumers are still spending as unemployment remains at record low levels. Monthly retail sales rose 0.9%, higher than market expectations of an increase of 0.8%. Industrial production, and capacity utilisation figures also surprised to the upside.

At the same time, higher interest rate expectations are filtering through to the housing market, with U.S. housing starts and existing home sales data coming in below expectations, whilst mortgage applications fell 11.0% on a weekly basis. The NY Empire State manufacturing index recorded a drop to -11.60 in May, more than market expectations for a decrease to a level of 15.50. Initial jobless claims also rose more than expected.

China lowered its 5-year loan prime rate by 15 bps to 4.45%, a record cut and bigger than expected after home prices fell in April for an eight straight month. The rate is a reference for home mortgages and other long-term loans. Meanwhile, other economic data releases also indicate that the Chinese economy is slowing. Retail sales and industrial output data for April lagged estimates amid continued pandemic lockdowns reflecting China’s zero-COVID approach. Goldman Sachs cut its forecast for China’s GDP growth this year to 4% from 4.5%, citing worse-than-expected economic data in April.

The European Commission (EC) cut its forecast for 2022 Eurozone GDP growth to 2.7% from 4.0% and raised its estimate for inflation to 6.1% from 3.5% to reflect higher energy prices. First quarter GDP growth was however revised higher to 0.3% from the previous estimate of 0.2%. It also announced a EUR 300 billion plan called REPowerEU that aims to end the European Union’s dependence on Russian energy imports before 2030. It is based on four pillars: saving energy, substituting Russian energy with other fossil fuels, boosting green energy, and financing new pipelines and liquefied natural gas terminals. Unused loans from the pandemic recovery program will provide most of the cash for the plan.

UK inflation accelerated in April to the highest level since 1982, hitting 9.0% on higher electricity and gas prices. Consumer confidence has also plummeted to its lowest level in 50 years, whilst retail sales unexpectedly advanced by 1.4% in April and unemployment declined to 3.7%, its strongest reading since 1974.

Late selling in the U.S. on Friday saw the Dow Jones (-2.90%), S&P 500 (-3.05%) and Nasdaq (-3.82%) all ending the week sharply down. European markets also ended the week in negative territory with the Euro Stoxx 50 (-1.24%) and FTSE 100 (-0.38%) softer, whilst Asian markets including the Nikkei 225 (+1.18%) and Shanghai Composite (+2.02%) were positive.  

Market Moves of the Week:

The South African Reserve Bank raised its repo rate by 0.50% to 4.75%, in line with the market’s expectations. This follows April’s inflation print of 5.9% (annualised) earlier in the week, which is unchanged from the prior month, also in line with market expectations.

Public Enterprises Minister Pravin Gordhan announced a shake-up of state-owned companies (SOEs) on Friday, that will set them on a stronger commercial footing by creating a “centralised shareholder model” under a state-owned holding company. The holding company will embrace government’s commercial entities that engage in business activities, such as Eskom and Transnet. Gordhan said much progress had already been made and that a Shareholder Bill would be introduced after approval by Cabinet.

The ANC has also drafted a proposal ahead of its ANC policy conference this year, for an overhaul of SA’s social housing policy. The draft proposal is aimed at shifting the focus from the provision of free mass housing to encouraging citizens to build their own homes via special interest rate and tax incentives.

The JSE All-Share Index ended the week down -1.57%, dragged lower by the industrial sector (-5.32%), after heavy-weight Compagnie Richemont reported results that disappointed the market, sending its share price down -12.87% on Friday. Meanwhile, resource (+2.49%) and financial (+0.07%) shares were stronger. By Friday close, the rand was trading at R15.83 to the U.S. Dollar, strengthening over the week after the SARB hiked rates by 50 basis points.

Chart of the Week:

2022 has got off to a tough start for investors. In times like these, it is an important reminder of the benefits of staying invested and not attempting to time your exit and re-entry into the market. Staying out for only a few days can be disastrous to long-term wealth creation. This chart shows what would have happened by late 2019 to $1,000 invested in U.S. stocks in 1970. Missing out on only a few of the best-performing days would have a drastic effect on compounded returns, with daily price moves being unpredictable. Source: Dimensional Fund Advisors.

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.