S2-19: Bear Market, Q1 GDP Miss & A Deep Dive on Cryptocurrency and NFTs
Last week, we saw the 4th consecutive week of down markets, with April performance coming in as the worst month since March 2020 for the S&P 500, and the worst month for the NASDAQ since 2008. The week also included an expected decline in real GDP for Q1 2022, adding credibility to investors’ recession concerns. What’s behind it all and could a market bottom be near? Catch it all on this week’s podcast, along with a deep dive on the latest financial craze, cryptocurrency, and NFTs, with Dr. Merav Ozair, a FinTech professor at Rutgers Business School and leading global expert on global leading expert on blockchain and cryptocurrency.
April Market Update
Last week, the market continued its downward April trend, finishing down -3.27%, the fourth consecutive week of negative performance. For the month of April, the S&P 500 finished down -8.8%, and is now officially in correction territory, down -13.31% year-to-date. The more volatile, tech-heavy NASDAQ is down further, -21.16% for the year, officially in bear market territory. Day to day market performance continues to be more volatile than normal with ongoing Q1 earnings season bringing more negative guidance by companies for the year to come. And last week, everyone was surprised by not just a miss on Q1 GDP expectations, but actually a decline in real GDP.
Interest rates continue to increase across the maturity spectrum, with 10-year yields getting closer and closer to 3%. Last week, 10-year yields ended the week at 2.93%, as many investors await the FOMC’s May meeting announcement, where most anticipate the Fed to increase the Federal Funds rate by 50bps, to a 1.0% target, and to officially begin their unwinding of the trillions of dollars in mortage-backed securities and treasury bonds they added to their balance sheet over the last two years.
Recall, the Fed is expected to announce a series of interest rate increases this year, the first of which already occurred in March, in an effort to reduce inflation to more normal levels.
Related Post: 5 Factors Driving Higher Inflation & What You Can Do to Prepare
Interest Rates Update
With the rise in interest rates, there has been more focus and discussion of the yield curve. The yield curve is simply a plot of the current market interest rates, or yields, on the bonds of a single issuer, most often, the US government. The current yield curve for US treasuries has jumped significantly in recent weeks, especially for mid-term interest rates, those on bonds ranging in maturity from 2 to 10 years. All rates for 2 years and beyond are now significantly above pre-pandemic levels.
Many investors are closely watching the spread, or difference in rates, between varying maturities. Typically, in normal economic environments, the yield curve slopes up and to the right, with longer-dated maturities, like 10 and 30-year treasuries, having higher yields than shorter-term maturities. But in early April, for a brief few days, the yield curve inverted, with 10-year yields falling below 2-year yields. Historically, an inverted yield curve, when shorter-term rates are higher than long-term rates, has been an almost perfect predictor of a coming economic recession.
Investors watch the 2 and 10-year yields for signs of inversion, or when the 2-year yield exceeds the 10-year yield. It also is not an immediate indicator. Historically, on average, the inversion occurs 12-18 months before the recession begins. The yield curve inverts because investors are predicting an economic slowdown, which typically results in the Fed dropping interest rates – so they are essentially pricing in that expectation of a future drop in interest rates. And last week’s announcement of a decline in real GDP for Q1, only added to those concerns.
The recessions of the early 1990s, 2000 DotCom Bubble recession, Great Recession and even the pandemic-induced recession were all preceded by a yield curve inversion.
Q1 Real GDP Declines
The biggest economic news last week was the announcement of the first estimate of Q1 GDP. And it suprised everyone. Most economists were predicting modest 1-1.5% growth, and instead, real GDP declined -1.4% on an annualized basis.
Now, as with most financial and economic data, the devil is in the details – so what actually drove the GDP decline? Consumer spending, which represents nearly 2/3s of the US economy, actually remained relatively strong, up +2.7% for the quarter, contributing +1.9% to Q1 real GDP growth.
Private investment, including things like businesses investing in equipment and facilities, and residential construction, was also positive, though offset by a decline in inventories – whether driven by supply chain concerns or business expectation concerns remains to be seen. Private investment was up +2.3% for the quarter, and contributed +0.5% to Q1 real GDP growth.
So if consumption and investment were both up, how did GDP decline? US exports were down and imports were up dramatically, both of which created the bulk of the decline in GDP. Exports, goods we produce in the US and send overseas, were down -5.9%, while imports, goods produced overseas that we bring in and buy here, were up +17.7%, creating a -3.2% drag on Q1 real GDP growth. Effectively, we are boosting foreign GDP at our own economic expense.
We also faced a small headwind from a decline in Government spending, due to the drop off in stimulus and Covid funding as well as a decline in defense spending.
Now, does this mean a recession has begun? Not necessarily. Officially, the National Bureau of Economic Research defines the official start and end dates of recessions here in the US. It is typically marked by 2 consecutive quarters of US GDP decline. Some experts say the Q1 decline is merely the impact of a global economy still plagued (no pun intended) by the fits and starts of a re-opening economy and clogged supply chain post-pandemic, and growth may continue to be erratic this year as it all sorts out. In Q1, major global economies, like Shanghai, were in pandemic lockdown. Others say its a sign of the slowdown to come as inflation takes its toll. The first quarter still had the benefit of strong domestic consumer spending, but the latest savings rates numbers would indicate the funds to support that have run out.
I’ll continue to watch monthly consumption, income and savings numbers to know where things are headed for Q2 and the rest of 2022.
Q1 2022 Earnings Season Continues
The first quarter of 2022 earnings season is now well-underway, with more than half of all S&P 500 companies reporting. And while 80% of companies are beating earnings, it’s their guidance for the rest of the year that has markets and investors concerned. Growth vs. 2021 was expected to fall, but companies are guiding it to drop more than many investors anticipated, especially high growth companies that really benefitted during the pandemic, like Communication Services and Tech companies, while inflationary pressures are also driving down earnings growth.
So far, 60% of S&P 500 companies reporting have given negative guidance for Q2 – which means they are guiding investor expectations for earnings down. At the same time, due to rising interest rates and lower growth rates, valuation ratios are dropping too. The current forward P/E ratio dropped another 0.5x in the last week, and now sits below the 5-year average, and just 7% above the 10-year average.
However, this drop in both earnings and valuation ratios creates a double whammy on share prices, which is why you’re seeing a double-digit declines in the market indices.
Demystifying DeFi: A Deep Dive on Cryptocurrency and NFTs
This week’s podcast deep dive features a conversation with FinTech Professor and leading global blockchain and cryptocurrency expert, Dr. Merav Ozair. We start with the basics – what are all these terms? And move on to the philosophical – how and why are they democratizing finance and how could they revolutionize the industry? You don’t need to be a tech expert to understand, nor do you have to jump on the bandwagon and invest in crypto, but if you want to be more informed about the fastest growing trends in finance, this is the conversation for you!
Dr. Merav Ozair, FinTech Professor, Rutgers Business School
Dr. Merav Ozair is a global leading expert on blockchain and cryptocurrency, with a background of a data scientist and a quant strategist. She has in-depth knowledge and experience in global financial markets and its market microstructure. Currently, Dr. Ozair applies her unique expertise to researching the blockchain ecosystem and experimenting with distributed ledger technology (DLT) – specifically, decentralized finance (DeFi),non-fungible tokens (NFTs), and decentralized autonomous
organizations (DAOs) applications across different industries and business use cases.
Dr. Ozair is a FinTech Professor at Rutgers Business School (RBS). At RBS she has developed and teaches courses on blockchain and digital assets for both undergrads and graduate level. She serves as an advisor and researcher at the Rutgers Blockchain and FinTech Collaboratory; and is an affiliated professor at Rutgers Law School, focusing on DeFi.
She has been frequently interviewed on blockchain, NFTs and DeFi space by world-wide media, such as Bloomberg, BBC, New York Times, Forbes, The Hindu, New York Post, The Washington Post, USA Today, Fox 5 New York, Good Morning America (ABC channel), yahoo!, The Motley Fool, RIA Intel, NJ Business Beat, Jersey Matters, KCUR. Dr. Ozair is the Editor-in-Chief of the World Scientific Series in FinTech and is a member of the Academic Advisory Board at INATBA (International Association for Trusted Blockchain Applications.) She holds a Ph.D. from Stern Business School at NYU.
Connect with Dr. Ozair:
DoctorBlockchain.io
Rutgers Faculty Page
LinkedIn
Coming up in the week ahead: Tuesday we will get info on Job Openings and Labor Turnover for March, Wednesday is the eagerly awaited FOMC statement from the Fed for May, and Friday the monthly Employment Situation report for April. Lots of economic info, as well as the continuation of Q1 earnings season should make for an active week in the markets!
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