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Key Points for the Week

  • Equities struggled and suffered a fourth consecutive week of losses, with weak Q1 earnings providing the largest headwinds.
  • The S&P 500 is now down 13.5% from its recent peak, with Friday’s close the lowest in 2022.
  • GDP came in below expectations, but it was mostly driven by reduced inventories and weak exports.

You’re Invited: Finding Calm in the Market’s Turbulence

On Wednesday, May 11th at 6:00 PM, we will be hosting a virtual town hall to discuss what the latest stock market turbulence means for you. Our panel of tax-integrated advisors will break down the facts and answer your questions.

Panelists include President & CEO Edward G. Sella, as well as Matthew Gilchrist, Jason Davis, Leo Martinic, Elise Weinstein, Rory McGlynn, and Bradley Lipman.

Reserve Your Virtual Seat →


To-date, economic, coronavirus-related, and geopolitical events have taken a toll from stock and bond markets, as well as the U.S. economy. For example:

  • Prices were rising as we entered the year and have continued to rise. Last week, the Personal Consumption Expenditures Price Index, a broad gauge of inflation across the United States, reported that inflation was 6.6 percent in March 2022, up from 5.8 percent in December 2021.
  • The Russia-Ukraine War is pushing inflation higher. Russia and Ukraine are major exporters of energy and agriculture products, and their exports have been limited by the war. Consequently, the World Bank’s Commodity Market Outlook forecasts that energy prices will rise by 50.5 percent and non-energy prices by 19.2 percent this year before moving lower again in 2023.
  • China is locking down cities to fight a surge of COVID-19 and snarling supply chains. “Ships have been piling up outside Shanghai, the world’s largest port, and other container docks across China as authorities have forced multiple cities into lockdown to counter the country’s worst COVID outbreak since the pandemic began,” reported Eamon Barrett of Fortune. Cross-border restrictions on trucking have also created issues.
  • The Federal Reserve began raising the fed funds rate to address inflation. The Fed is expected to raise rates significantly this year as it works to reduce demand and lower inflation. When interest rates move higher, the cost of borrowing increases, and economic activity slows. As a result, some investors are concerned about the possibility of recession.

Recession fears were top-of-mind last week when the Bureau of Economic Analysis reported that U.S. gross domestic product (GDP) – the value of all goods and services produced in the country – contracted 1.4 percent during the first quarter of 2022. Greg Daco, chief economist of EY-Parthenon, wrote in Barron’s:

To the untrained eye, such a GDP contraction would raise concern that the economy is headed toward a recession…paradoxically, the main reason GDP contracted in Q1 is that the U.S. economy grew faster than its peers. Robust private sector activity driven by solid consumer outlays, accelerating business investment, and inventory restocking pulled in imports at an extremely rapid pace while a sluggish global economy meant exports fell back.

Greg Daco, chief economist of EY-Parthenon

Major U.S. stock indices fell last week. The Standard & Poor’s 500 and Nasdaq Composite Indices are in correction territory, down more than 10 percent for the year, and the Dow Jones Industrial Average is close to a correction, reported Ben Levisohn of Barron’s.

This Week in the Markets

Market volatility continued last week as global markets tried to digest a slew of earnings reports and economic updates. Likely the biggest release was the U.S. GDP report for the first quarter, which showed the U.S. economy contracted by an annualized 1.4% over the first three months of the year. While the market initially responded positively, it was obvious by the end of the week that equity markets were nervous.

CTN 05-02-22 Image 1

Adding to the apprehension were earnings releases that forecasted lower profits than expected for future quarters.

Home prices for the Case-Shiller indexes remained elevated in February, not just in the largest markets but nationwide. Meanwhile, new home sales fell 8.6% in March as inventory remained low and mortgage rates continued their rise.

PCE inflation remains stubbornly high, with the headline figure up 6.6% year-over-year and 0.9% month-over-month. The core number fell slightly to 5.2% year-over-year. The market will be paying close attention to the Federal Reserve this week as it meets May 3-4.

Economic Report Card

On the surface, the first quarter U.S. GDP report looked disappointing. The market expected an annualized increase of 1% but was greeted with an annualized decline of 1.4% instead. This came after 2021 showed strong growth throughout the year and was ended with 6.9% growth in the fourth quarter.

So why was this report seen as relatively positive? Two factors were significant drags on growth, both of which tend to be volatile: change in private inventories and net exports. The change in private inventories is a quirky calculation. It was reported as -0.8% since last quarter, but inventories increased during the quarter. The reason it’s negative is inventories didn’t rise by as much as the previous quarter when they increased 5.3%. In other words, Q1 was being compared to a huge number from Q4 2021, which it couldn’t keep up with even though it was still positive.

On net exports, there was a large shift in the amount of goods exported to other countries. The reason for this is twofold. First, demand for goods and services around the world declined over the first quarter because of the conflict between Russia and Ukraine, so there was less demand by foreign consumers to buy U.S. goods. Second, the goods and services produced in the U.S. got more expensive for international buyers because the U.S. dollar strengthened in the first quarter. These two factors led to net exports declining by 1.2% annualized.

Other than those two components, the report was largely positive. U.S. consumption remains strong, with demand for durable goods and services showing large gains. The increase in durable goods is important because it shows the production of larger items, especially vehicles, is increasing. That should help some of the inflationary pressures that come from scarcity. Similarly, the increase in services demand is positive because it indicates some COVID-19 fears have faded, meaning people are more likely to go out and spend money on experiences rather than things.

Another strong aspect of the report was business investment, which increased 2.2% from last quarter. This means businesses are spending to increase their capacity through information technology, machinery, and building out intellectual property, which should help alleviate some supply chain issues and allow them to keep up with demand.

Overall, the report indicates the U.S. consumer is still strong and companies are doing what they can to keep up with demand while relying more heavily on imports.

Many are wondering whether we are heading into a recession. In any given year there is a 14% chance that a recession will occur. Given the conflict in Ukraine, the continued supply chain issues, inflationary pressures, and the fact that an interest-rate-hike cycle is beginning, the likelihood of recession is higher than average, around 20%-25%. However, what’s keeping a recession from being the base case, or most likely scenario, is strong demand in the U.S. While the headline number from the GDP report may have added to some anxiety, underlying strength is keeping the economy on solid footing.

Value Stocks May Be Cycling Into Favor

For more than a decade, interest rates in the United States have been very low. During this time, growth stocks, which benefit from low rates, have outperformed value stocks. As of last Friday, the MSCI All-Country World Index (ACWI) Growth, which measures the performance of growth stocks, was up 9.51 percent for the last decade. The MSCI ACWI Value, which measures the performance of value stocks, returned 4.47 percent, over the same period.

It looks as though that may be beginning to change.

Growth stocks are shares of companies that are expected to grow more quickly than other companies. These companies often do not pay dividends. Instead, they reinvest any profits to grow the company quickly. The valuation of growth stocks may seem expensive; however, if the company grows fast the valuation may seem low and the company’s share price may rise. Many technology companies fall into this category.

In 2022, growth stocks have languished. “High-growth technology stocks that sparkled in the coronavirus crisis have entered a bear market as shifting consumer habits and the prospect of sharp U.S. interest rate rises force investors out of one of the most lucrative trades of recent years…the prospect of rate rises has hurt low-profit, high-growth technology stocks because those companies’ future cash flows look relatively less attractive,” reported Laurence Fletcher of the Financial Times.

Value stocks are shares of companies which trade at valuations that are lower than company fundamentals – earnings, dividends, sales, cash flow, and other metrics – suggest they should trade at. Often these are mature companies that pay dividends. Some might even have been growth companies at one time.

Historically, there have been periods when value has outperformed growth. For example, this year, through last Friday, value stocks (MSCI ACWI Value, -6.69 percent) delivered better returns than growth stocks (MSCI ACWI Growth, -20.03 percent).

Recent performance doesn’t mean it’s better to own value shares than growth shares or vice versa, as Saira Malik of FT explained. “Of course, there have been times when value has beaten growth and vice versa – sometimes by wide margins and for extended periods. But betting on one style over the other based on the magnitude or duration of its past outperformance in any given timeframe is not a sound strategy for maximizing returns. The reason is simple: performance drivers are period-specific, hard to predict and unlikely to be repeated.”

A good choice is diversification. Holding a well-allocated and diversified portfolio won’t eliminate losses, but it can help investors manage risk during periods of market volatility.

IRS Issues Identity Theft Warning

The IRS is reminding taxpayers to be vigilant and watch out for IRS impersonation scams intended to trick them into providing their personal and financial information. Some of the schemes included text message, e-mail, and phone scams. The IRS also warns people to be aware of potential unemployment fraud.

Text Message Scams

If you receive an unsolicited text message claiming to be from the IRS or a program linked to the IRS, take a screenshot of the message and email it to phishing@irs.gov with the below information:

  • Date/time/time zone the text message was received.
  • Phone number that received the text message.
  • Do not click on links or attachments from suspicious or unexpected messages.

E-mail Phishing Scams

Please be aware that the IRS does not contact taxpayers by email to request personal or financial information. Most of the time, the IRS will contact taxpayers through regular mail delivered by the United States Postal Service. Similar to a potential text message scam, report the email to phishing@irs.gov by sending the suspicious email as an attachment.

Phone Scams

The IRS (and its authorized private collection agencies) will never:

  • Call requesting immediate payment using prepaid debit cards, gift cards, or wire transfer.
  • Threaten to arrest a taxpayer by bringing in law-enforcement or local police.
  • Demand taxes be paid without the opportunity to question or appeal the amount owed.
  • Ask for credit or debit card numbers over the phone

Unemployment Fraud

Organized crime rings have started using stolen identities to claim unemployment or other benefits for which the taxpayer never applied. Victims of unemployment identity theft may receive:

  • Mail from a government agency about an unemployment claim or payment they did not file.
  • An IRS Form 1099-G reflecting benefits that were not expected or received. The form itself may also be from a state for which the taxpayer did not file for benefits.

For information on necessary steps to take for suspected unemployment fraud, taxpayers can visit the U.S. Department of Labor’s fraud page here.

The IRS focuses on tax-related identity theft and suggested taxpayers take the below steps if they feel their Social Security number has been compromised:

  • Respond immediately to any IRS notice and call the number provided.
  • Complete IRS Form 14039 (Identity Theft affidavit).
  • Continue to pay their taxes and file their tax return, even if it must be done by paper.
  • For specialized assistance, call 1-800-908-4490.

If you have any questions about this information, please contact us.

Did you Know? This Week in History

May 2, 1933: Loch Ness” Monster Sighted for First Time, Igniting Modern Legend

The modern legend of the Loch Ness Monster after a local couple claimed to have seen “an enormous animal rolling and plunging on the surface.” The story of the “monster” (a moniker chosen by the Inverness Courier editor) quickly became a media phenomenon, with London newspapers sending correspondents to Scotland and a circus offering a 20,000-pound sterling reward for capture of the beast.

After the April 1933 sighting was reported in the Inverness Courier newspaper on May 2, interest steadily grew, especially after another couple claimed to have seen the animal on land.

The search for the Loch Ness monster has continued for decades by both amateurs and professional investigators, with several universities launching solar expeditions to the lake. While nothing conclusive has been found, throughout the years difference sonar operators have detected some type of large, moving, underwater objects. In 1975, a photo was taken that seemed to resemble a giant flipper of an animal living in the lake.

Further sonar expeditions in the 1980s and 1990s resulted in more inconclusive readings. Revelations in 1994 that the famous 1934 photo was a complete hoax has only slightly dampened the enthusiasm of tourists and investigators for the legendary beast of Loch Ness.

Weekly Focus

In the long run, we shape our lives, and we shape ourselves. The process never ends until we die. And the choices we make are ultimately our own responsibility.

Eleanor Roosevelt, Former First Lady

Live as if you were to die tomorrow. Learn as if you were to live forever.

Mahatma Gandhi, Indian Political Ethicist