The Slippery Slope

Investment Insights: Market Update

HIGHLIGHTS:

  • Asset prices remain under significant pressure as inflation concerns continue to dominate earnings calls and dampen expectations for future growth.
  • Depressed sentiment among consumers and businesses may ultimately lead to the demand destruction that will slow inflation.
  • With a robust jobs market, consumers should find themselves on stronger footing over time, and price increases should moderate compared to the explosive rates of the last 12 months.

Asset prices remain under significant pressure as inflation concerns continue to dominate earnings calls and dampen expectations for future growth. Major retailers' rising input costs have depressed expectations for profit margins, and consumer sentiment continues to lag. Will inflation continue to dominate the conversation, or is the impact now fully reflected in valuations?  While a recovery is expected, the path ahead will likely be a difficult and slippery slope.

Consumer spending, supported by moderate levels of debt and low unemployment, may be shifting from the durable goods, leisure activities, and services we had been hoping to see towards basic needs like food, fuel, and housing. These necessities may represent less of a benefit to the broader economy.  Higher prices in the market and at the gas pump are eroding the ability of shoppers to indulge in the more discretionary sectors, resulting in both lower corporate profits and a grumpier consumer. While the odds of an actual recession in 2022 remain low, the fact that a higher portion of spending is now going to essentials suggests that any growth we do see will feel less productive; valuations will struggle to find traction as a consequence. Depressed sentiment among consumers and businesses may ultimately lead to the demand destruction that will slow inflation—but it may also sow the seeds for even lower growth in quarters to come.

With a robust jobs market, consumers should find themselves on stronger footing over time, and price increases should moderate compared to the explosive rates of the last 12 months.  Progress should also be expected as many of the ultimate sources of risk are unlikely to get worse—but with each passing week of realized risk and declining index values the pathway towards a profitable year becomes even more slippery and arduous. The coming weeks and months, even if additive, may well become a case of two steps forward, one step back, as the peak pressures of this spring continue to subside.

Market Dashboard

Financial market data for various time periods covering global asset classes.  Data as of May 17, 2022.

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Contributors

[Contributors Section]
Cyrus Charna
Investment Strategy Officer
Ben Baier
Lead Investment Officer
Wade Balliet, CFA
Chief Investment Adviser