Lending markets

Key Factors Behind Markets Selling Off

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In the latest edition of Market Week in Review, North America Chief Investment Strategist Paul Eitelman and research analyst Emily Zhao explored the key drivers of the recent market volatility crisis. They also assessed the prospects for markets through the lens of cycle, valuation and sentiment, and discussed the current state of the global economy.

S&P 500 nears bear market territory as selling heats up

Addressing the recent market crashEitelman noted that the week of May 16 was particularly difficult for U.S. equities, with the S&P 500® Index down about 4% at market close on May 19. the index closer to a bear market, with the cumulative peak-to-trough decline for the S&P this year now at 19%,” he said, calling the 2022 selloff significant and serious.

The slowdown in markets since the start of the year can be attributed to a few main factors, Eitelman said, including Russia’s invasion of Ukraine in late February, which sent commodity prices soaring. At the same time, inflation continued to hit multi-decade highs, he noted, prompting the US Federal Reserve (FED) to embark on an aggressive rate hike cycle as it attempts to contain price pressures by increasing borrowing costs. “The net effect of all of this has been increased anxiety about the prospects of slowing economic growth – and those worries are really reverberating through financial markets right now,” Eitelman noted.

The latest round of volatility was sparked by a few major corporate earnings lapses at some major U.S. retailers, including Walmart and Target, he said, with both companies noting that significant cost pressures are impacting the profitability. In addition, retail giants said inflationary pressures are prompting consumers to cut back on big-ticket items and be more budget-conscious in their spending habits, Eitelman noted.

Market Outlook: Business Cycle vs. Investor Sentiment

Regarding the outlook for markets amid the current turmoil, Eitelman said valuation of US equities through Russell Investments’ Cycle, Valuation and Sentiment (CVS) framework highlights some pretty significant tensions. . Cyclical concerns have increased as the economic cycle is maturing rapidly, he says, which leaves him a little more cautious. “On the other hand, our contrarian indicator shows that market sentiment has turned very pessimistic – and that’s a pretty strong tactical signal for us,” he said.

Ultimately, competing signals within the CVS investment framework have led Eitelman and the strategy team at Russell Investments to maintain a balanced investment approach for the time being. “At the moment, our preference is to stick to our long-term strategic asset allocation,” he said.

Are signs of weakness emerging in the global economy?

Amid the volatile markets, Zhao asked Eitelman how the global economy has fared this year. Eitelman said overall the economy has been quite resilient, but some areas of weakness may be starting to emerge.

One of the most obvious pockets of weakness is in China, he said, due to rising COVID-19 infections that led to lockdowns in major cities like Shanghai and Beijing in March. and April. The shutdowns have had some pretty big economic impacts, Eitelman noted, but with the COVID-19 situation improving a bit, expectations are rising that China’s growth could rebound in the second half. “This could especially turn out to be the case if the Chinese government adopts new stimulus measures,” he noted.

Growing concerns that tighter Fed policy could tip the economy into a recession are also beginning to impact business confidence, Eitelman said, noting that U.S. CEOs have increasingly soured on economic outlook. In addition, growth in the manufacturing sector – particularly in the United States – has started to slow down a bit from the very high rates seen in recent years, he said. “In the US, we’re seeing more average growth rates right now — but it’s growth nonetheless,” Eitelman noted.

He said the final area that is showing a bit of weakness right now is the global real estate market, due to rising mortgage rates. “The sharp rise in rates is creating affordability issues for many people, and that’s reduced real estate demand a bit,” Eitelman concluded.

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