Halyard’s Weekly Wrap – 04/29/22

Last week we flagged the advance report of Q1 GDP as the economic report to watch this week, and we were spot on.  Investors were shocked to learn that economic activity contracted 1.5% in the first quarter, driven primarily by trade and government spending.  On the bright side, the consumer continued to spend, with the personal consumption measure rising 4.7% over Q1 2021.  But a big expansion in imports and reduced government handouts were more than enough to offset the gain in consumption.

However, the more worrisome economic stats this week were new home sales and pending home sales, both of which plunged since last month; a clear indication that the rise in mortgage rates is slowing the sector.  New homes sales are an especially important driver of the economy, both in terms of construction jobs, and the purchase of carpets, drapes, furniture and the various other items bought to outfit and decorate the new home.  The National Association of Home Builders this week described the market as being “under extreme duress” and urged President Biden to reduce or eliminate tariffs on Canadian lumber.  We think extreme duress is too strong a description of the sector, but we’re moving into prime home sale season and if the twin costs of building and financing a home remains high, this sector and the economy are certain to suffer.

As if the housing sector and the continued elevated cost of fuel weren’t enough to ding consumer confidence, all four of the FANG stocks (Facebook, Amazon, Netflix, and Google) have moved sharply lower this year, as has the retail darling ETF Ark Innovation.  We think it would be a mistake to underestimate the effect retail stock trading has had on the broader economy over the last two years.  Upon suffering trading losses, retail traders are likely to tighten their belts elsewhere, at least until their winning streak returns.  …and if it doesn’t, the risk of a more significant pullback becomes likely.

But not to focus entirely on negative indicators.  The April employment report, to be released next Friday, is likely to show another month of well-above trend gain in jobs.  Weekly initial claims for unemployment insurance have been trending lower, giving us no reason to doubt the consensus forecast for 385,000 new jobs.  A robust job market, which is how we’d describe the current state, is going to be the best indicator of economic growth.  We can only hope it outweighs the numerous negative indicators mention in the first three paragraphs.

Finally, we’d be remiss if we didn’t mention next Wednesday’s rate hike decision.  The Fed has cleared the way for a 50 basis point hike, but there have been hints that it could be as much as 75 basis points.  We’re in the 50 basis point camp, in that we don’t think this committee is bold enough to do more than that.

This commentary is being provided by Halyard Asset Management, L.L.C. and its affiliates (collectively “Halyard” or “we”) for informational and discussion purposes only and does not constitute, and should not be construed as, investment advice, or a recommendation with respect to the securities used, or an offer or solicitation, and is not the basis for any contract to purchase or sell any security, or other instrument, or for Halyard to enter into or arrange any type of transaction as a consequence of any information contained herein.  Although the information herein has been obtained from public and private sources and data that we believe to be reliable, we make no representation as its accuracy or completeness.  The views expressed herein represent the opinions of Halyard Asset Management, LLC, or any of its affiliates, and are not intended as a forecast or guarantee of future results. Past performance is not indicative of future results.