Financial Market Breakdown – Week of May 2, 2022


Quick Highlights

  • Futures are enjoying a modest oversold bounce following Friday’s selloff, but there was no improvement over the weekend on the three headwinds pressuring stocks: Chinese growth worries, the war in Ukraine, and a hawkish Fed.
  • Economic data was mixed as the April Chinese manufacturing PMI dropped further (to 47.4 from 49.5) while the EU PMI slightly beat estimates (55.5 vs. (E) 55.3) and German Retail Sales underwhelmed (-0.1% vs. (E) 0.3%).
  • Econ Today: ISM Manufacturing PMI (E: 58.0).

What’s Happening in the Financial Market?

Stocks were volatile last week as mostly solid earnings (notably from tech) helped offset early-week concerns about the health of the global economy. The S&P 500 fell 3.27% on the week and is down 13.31% YTD.
From a technical standpoint, last week was downright ugly as the Nasdaq Composite fell to a 52-week low while the S&;P 500 hit new lows for the year electing the downside measured move target of 3,545 out of the bearish head and shoulders that has been in the works since the fall. That shifts the near-term path of least resistance lower; however, we should not be surprised by some volatile bear-market-style rallies in the coming sessions. The next level of notable support lies at 4,060 while to the upside, look for initial resistance around 4,300 where sellers would be likely to step back into the market. The only market positive from a technical perspective last week was that Dow Theory avoided turning bearish by roughly 30 points in the Dow Industrials, which suggests the long-term trend has not yet turned negative—but we are on the brink.
The S&P 500 dropped sharply Friday, broke the 2022 YTD lows, and the technical outlook turned decidedly more negative as markets continue to face multiple headwinds from a hawkish Fed, global growth risks from the Russia–Ukraine war, and global growth risks from China’s “Zero COVID” policy and lockdowns.
Looking at Friday, the negative catalysts were: earnings (AMZN and AAPL, although neither report was that bad, it’s just that the market doesn’t have tolerance for underwhelming numbers right now) and unit labor costs. Yes, the Core PCE Price Index slightly underwhelmed, but ULCs were hotter than expected and that implies inflation is becoming entrenched as wages don’t tend to go down much (they set a floor)—and that will keep the Fed hawkish.
So, while earnings and ULCs were the negative catalyst for Friday (combined with no one wanting to be long into the weekend), the bigger issue is this market is facing a generationally hawkish Fed and real global growth concerns via the war and China’s “Zero COVID” policy. Until we get some catalyst to make the Fed less hawkish, real progress on a ceasefire in Ukraine, or China abandoning the “Zero COVID” policy, it’ll be hard to get a sustained stock rally.
To that point, it’s not that the macro outlook got that much worse last week. Fed tightening expectations didn’t rise materially, the Russia–Ukraine war didn’t expand, and Covid cases in China are actually starting to peak. But it doesn’t really matter because nothing positive happened to reduce any of those risks—and in a market where sentiment is this negative, that leaves the path of least resistance lower. The point is that the past two-week drop in the S&P 500 (which is nearing a 10% decline) hasn’t been caused by a lot of incrementally negative news, it’s been caused by a total lack of any “good news,” so that negative narrative is defining the market and it’s “sell first, ask questions later.”

Bottom Line

Clearly, sentiment is very negative, and with the S&P 500 breaking to new lows, this decline isn’t over. And barring a major rebound this week, it appears the 4,200ish-4,600ish trading range is in danger of being broken to the downside.
Beyond the short term, the case can be made the outlook isn’t as negative as the price action would imply. Specifically, the market isn’t pricing in much of a chance of:
  1. Inflation peaking.
  2. The Fed backing off its hawkish crusade later in the summer and the year-end fed funds expectations being higher than reality).
  3. Covid cases declining in China (which is starting to occur already).
  4. Russia–Ukraine not getting materially worse.
If we get any solid evidence that any of those four things are occurring, this market is primed for a rebound and we think the 4,200- 4,600 range will hold.
Beyond a short-term rebound, and for stocks to mount a sustainable rebound that takes the S&P 500 back to 4,600, markets will need good news on growth expectations (meaning global recession risks start to fall instead of rise—again that’ll come from improvement in the Russia–Ukraine war and Chinese lockdowns) and the Fed easing off the hawkish rhetoric.
Sentiment is very negative and there are reasons to be cautious (as we’ve said throughout the year), but there’s a positive scenario to this market that’s not really being factored in at these levels.
We do not agree that the outlook has changed that negatively over the past two weeks, and as such, we’re continuing to hold positions and will continue to “hide” in less-volatile ETFs and sectors: value ETFs (VTV), defensive ETFs Energy (XLP), and inflation-linked ETFs (PDBC).

Near-Term General U.S. Stock Market Outlook

Near-Term (1 month) Stock Market Outlook: Neutral
Stocks dropped again last week and hit fresh 2022 lows thanks to continued firm inflation data, lackluster economic data (Q1 GDP), and rising risks of a global economic slowdown.

By The Numbers



Bane O'Leary