Month in Review: April // Expensive Markets + Inflation = Amazon

April 30, 2022

Russia invaded Ukraine just 65 days ago, and the world feels very different already. 

As we mentioned last month, we are beginning to see the supply chain issues hit the automotive and tech sectors quite noticeably. China’s shutdown is also affecting the supply chain, as inflation in energy and food prices does not look likely to decrease anytime soon either. 

Q1 2022 GDP Components (click to enlarge)

The Federal Reserve is starting to telegraph that a 50bps rate hike is likely at their next meeting. Already there’s talk that to put the inflation genie back in the bottle, the Federal Reserve is willing to be VERY aggressive in its stance to raise rates further and faster if necessary, which would likely further cool the upside potential to the US economy.

Meanwhile, GDP in the US came in at -1.4%, the first decline since 2020. As ominous as that sounds, it’s important to note that GDP was negative because of increased imports (strong consumer demand). Additionally, a large amount of inventory was built up in the 4th quarter; hence in the 1st quarter, inventory contribution to GDP was very low and a negative contributor overall.

The working definition of a recession is two consecutive quarters of negative economic growth. As we mentioned in our last update, while we cannot know when a recession will occur, given the recent spike in interest rates and the precedent of recessions following, we believe a recession is likely to occur. 

Currently, manufacturing in the US remains more robust than expected, and the job market remains strong. Housing starts and new home purchases and permits also reported better than expected numbers. Housing remains strong despite mortgage rates continuing to move higher, with the average 30-year fixed mortgage now pricing at 5.2%.

We attribute much of the continued stability in the housing sector to the secular trend that is in place. There is not enough inventory to soak up demand at current levels. But, every market has its limit, and we would not be surprised to see more sellers entering the market to cash in on what may be the tail end of a historic rise in real estate prices.

Elsewhere gasoline and diesel prices have not stabilized since the US strategic reserve was released. This month diesel was priced at an all-time high. This month, natural gas is also wildly higher, to the highest level since 2008. Elevated natural gas prices in Europe are close to posing an existential threat to many economic sectors across the continent. 

These supply chain issues and the persistently high commodity prices will continue to pressure margins and the market’s valuation. We believe that until we have year-over-year comparisons that have accounted for this new higher-priced reality, which would be closer to the end of this year, the environment will remain challenging, all things being equal.

University of Michigan Consumer Sentiment (2013-Present) (click to enlarge)

Additionally, the final numbers for April’s University of Michigan Consumer Confidence Index came in slightly below estimates, 65.2 versus the 65.7 expected. The overall downward trend is still in place, which is concerning (note: chart on the right).

70% of the US economy is based on consumer spending. So, a weakening sentiment can become a self-fulfilling prophecy for further weakness due to the negative feedback loop creating subsequently less confidence, which can depress the economy’s collective animal spirits. Franklin D. Roosevelt said it best, “the only thing we have to fear is fear itself.”

State of the Market 

The market remains fragile, and if the warning from Treasury Secre