Balance Will Be Key for the Year

It has been a volatile time on Wall Street, but don’t let a sell-off get you too despondent.
The war in Ukraine is still causing uncertainty, and central banks are still planning to raise rates aggressively. At an International Monetary Fund panel, Federal Reserve Chair Jerome Powell seemingly endorsed using 50-basis-point rate hikes in order to more quickly get the policy interest rate back to what the Fed thinks is a more “neutral” stance. Yields across the spectrum in both the United States and Germany are trading near cycle highs.

However, there are some interesting tea leaves to read in the micro of corporate earnings reports.
On the encouraging side, airlines have reported stellar results stemming from pent-up demand from both corporate and leisure travelers, as well as strong pricing power. Banks are seeing strong loan growth and resilient credit quality. Overall, corporate management teams may be a little bit more conservative than they were at the end of
last year, but they still seem quite upbeat about forward-looking demand and earnings prospects.

It is clear that sentiment is fragile and that markets are likely to remain volatile in the near term. However, there are a few signs that markets are getting a bit more comfortable with the current environment. Currently, 75 S&P 500 stocks are trading near 52-week highs, while 15 are trading at 52-week lows. The bond market is also becoming less worried about the Fed making a mistake. The 2s10s curve has steepened back to positive territory because the market is pricing in fewer cuts in the back half of 2023 and beyond. Fewer cuts are good signs because they imply a higher probability that the Fed can raise interest rates without having to cut them right away because they went too far.

While it appears likely that growth will slow down from the booming pace of 2021, we don’t think excessive concern is warranted either. It seems that markets are adjusting to a post-COVID-19 economy characterized by less policy support and more real-world interactions and commerce.

Rick Barragan is the Managing Director, Los Angeles Market Manager, for J.P. Morgan Private Bank.
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