Seeking Discernment

The major indexes finished lower for the week, with small-caps and growth stocks lagging considerably. Sector performance also varied widely within the S&P 500 Index, with the typically defensive consumer staples and health care sectors recording solid gains, while information technology, communication services, and consumer discretionary shares registered steep losses. Trading volumes were sparse for much of the week, as investors awaited the start of first-quarter earnings reporting season. Twitter shares jumped over 27.0% on Monday, however, following news that Elon Musk had acquired a 9.2% stake in the social media firm.

Federal Reserve policy and the situation in Ukraine continued to loom large over sentiment. Stocks pulled back sharply on Tuesday morning, after Fed Governor Lael Brainard, widely considered among the most dovish policymakers, promised in a speech that the Fed would start to reduce its balance sheet at a rapid pace as soon as the May meeting. This corroborated the minutes from the Fed’s mid-March policy meeting, where policymakers are considering reductions to the central bank’s balance sheet by $95 billion per month, more than the consensus expectation of around $80 billion. Reducing the Fed’s balance sheet will mean that liquidity/cash will be removed from the economy. Less cash means more expensive cash, due to reduced supply relative to demand. More expensive cash often leads to a negative market reaction from fear of businesses not being able to expand freely.

The Fed’s plans for rapid quantitative tightening (i.e., reducing the bond holdings on its balance sheet) also caused the yield on the benchmark 10-year U.S. Treasury note to hit its highest level since early 2019. The move led the closely watched two-year/10-year segment of the Treasury yield curve to steepen meaningfully, as the difference in yield between the two maturities increased. This was worrisome, in the short term, as these curves are often relied upon as recession predictors. However, the five-year/30-year curve segment—also considered by many investors to be a recession indicator—remained negatively (properly) sloped.

The week’s economic calendar was relatively light, but arguably suggested that the economy was proving resilient in the face of inflation and the war in Ukraine. Most notably, weekly jobless claims fell much more than expected, to 166,000—the lowest number since 1968. Continuing unemployment claims rose unexpectedly, however. The Institute for Supply Management’s gauge of service sector activity came in slightly below consensus expectations, but still indicated robust expansion.

Although headlines look to grab attention by focusing on the most eye-catching stories, they often do not capture the entire scope of the situation. The guidance of Proverbs states “the heart of the discerning acquires knowledge, for the ears of the wise seek it out” (Proverbs 18:15). We know there is much more to the overall financial health of our economy than what is making the news, and we’ll continue to seek out the full picture, so our ongoing discernment is as robust as possible.

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