Real Gross Domestic Product (GDP), which is the broadest measure of overall economic growth, declined by 1.4% at an annual rate in the first quarter of 2022. This was a significant slowdown from the end of last year when economic growth was running at 6.9%. Consensus estimates had called for growth of around 1.0%. Trade subtracted 3.2% from overall GDP due to the fact that we imported far more than we exported during the first three months of the year. In addition, consumer spending was strong, growing by 2.7% at an annual rate. Inflation was also a factor. The number most commonly cited is real GDP, which looks at growth in the economy after adjusting for changes in the level of inflation. Nominal GDP, on the other hand, looks at growth before subtracting out inflation. By this measure, the economy rose at a 6.5% annual rate in the first quarter and is up 10.6% from a year ago.
Source: Federal Reserve Bank of St. Louis
The Stock Market
The stock market closed out a rough month with both the S&P 500 and the Nasdaq finishing at their lows for 2022. The Nasdaq suffered its worst monthly loss since 2008 with a decline of 13.3% and the S&P 500 lost nearly 9%, its worst month since March of 2020. Communication Services, Consumer Discretionary and Information Technology sectors were all down by double digits during the month of April. The only sector in positive territory for the month was Consumer Staples.
Recent earnings reports have been broadly positive. According to FactSet, of the 280 S&P 500 companies that have reported first quarter results so far, 80% have beat earnings estimates. The blended earnings growth rate for the quarter is 7.1% and analysts still expect earnings growth of around 10% for the full year.
With overall earnings continuing to grow, the decline in the markets so far this year can be attributed to a contraction in the price-to-earnings (P/E) multiple. The chart below from J.P. Morgan separates the year-to-date return of -13.3% for the S&P 500 into two components: earnings, and the amount it costs to buy a dollar of those earnings. So far this year, estimated earnings for the next 12-months have increased by 5.2%, but the multiple that investors must pay for that future stream of earnings has declined by -18.5%.
Source: J.P. Morgan Guide to the Markets as of April 30, 2022
Interest rates continued to climb in April with the yield on the 10-year U.S. Treasury note rising by over a half a percent. It was the sharpest monthly increase since December 2009 and continues the same path that bond yields have traveled so far in 2021. Persistent inflation and the expectation that the Federal Reserve will likely need to take more forceful action to reign-in prices have pushed rates higher across the curve. The Fed meets the first week of May and is expected to raise short-term interest rates by at least 50 basis points. (One basis point equals 1/100th of 1%.)
Being an investor in 2022 has not been a fun experience. Stocks and bonds have both declined. Something that rarely happens in unison. That being said, those declines are now behind us. While it doesn’t mean there won’t be additional losses in the coming months, what it does mean is that the set-up for better returns going forward is better now than is has been in a while. Stocks have become less expensive while earnings estimates have continued to rise. Bond yields are now back to where they were in 2018, meaning fixed income actually provides some income compared to nearly zero just over a year ago.
The bad news is that no one can tell us when things will get better, but the good new is that they eventually will. History has shown that patient investors who are willing to endure periods of declines are usually rewarded in the long run.
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