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Monthly Economic and Investment Outlook

May 2022 Economic and Investment Outlook

United States

  • The preliminary estimate of real gross domestic product (GDP) decreased at an annual rate of 1.4% in Q1 of 2022, according to the BEA. Contributing to GDP growth: consumer spending added 1.8 percentage points (ppts) and capex 1.2 ppts. Subtracting from GDP: government spending subtracted -0.5 ppts, inventories – 0.8%, and trade -3.2 ppts.
  • The Commerce Department reported that the personal-consumption-expenditures (PCE) price index rose to 6.6% in March from one year earlier. The core PCE price index rose 5.2%. The Employment Cost Index (ECI), a measure that includes changes in wages and employer costs for employee benefits, rose 4.5% in Q1 from the previous year, which marked the fastest increase on record dating back to 2001.
  • Fed Chairman Jerome Powell described the labor market as “tight to an unhealthy level”. The unemployment rate remained unchanged at 3.6% in April, while the labor force participation rate fell 0.2 ppts to 62.2% as total employment declined by 353,000.
  • The economy added 431,000 nonfarm payroll jobs in April, marking the 12th consecutive month of gains above 400,000. On a year-over-year basis, average hourly earnings for all workers rose 5.5%. The 3-month average y/y pace slowed to 3.7%.
  • April’s ISM Manufacturing PMI fell 1.7 ppts to 55.4%, with new orders down 0.3 ppts to 53.5%, and production off 0.9 ppts to 53.6%, both at the lowest levels since the pandemic panic. Falling production still outpaces new orders – a headwind on prices paid, and in turn, inflation. The ISM Services PMI registered 57.1%, 1.2 ppts lower than March’s reading of 58.3%. The Prices Index reached an all-time high while the Supplier Deliveries Index increased, reflecting slower delivery times.

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Global

  • The International Monetary Fund (IMF) recently cut its global growth forecast to 3.6%, from 4.4% in January. The IMF also lowered its growth forecast for the eurozone to 2.8% from 3.9%, and for China to 4.4% from 5.5% in 2022.
  • The European Union’s statistic agency said the 19-nation eurozone’s GDP was 0.2% higher in Q1 2022 than Q4 2021, and up 5% compared with the same quarter of the previous year. As energy costs surge, economists suggest a slowdown in eurozone growth could become a recession if supplies of gas and energy from Russia are cut off. Eurostat recorded a pickup in the annual rate of inflation to 7.5% from 7.4% in March.
  • U.S. interest rates exceed those in Europe and Japan, thus attracting global fixed income investors and a bid for the U.S. Dollar. The U.S. Treasury’s data on cross-border financial flows shows that over the past 12 months through February, net inflows totaled a record $1.4 trillion.
  • The potential for re-bottlenecking exists in the context of more ships coming over from China should Covid lockdowns subside and the potential for more shippers ordering earlier trying to get ahead of potential labor disruptions at the West Coast ports as the Longshoremen labor contract expires on July 1st.
  • The world’s 2nd largest economy, China, is falling into a recession. The Caixin China Manufacturing PMI fell to a 26-month low of 46% in April 2022. The Caixin Services PMI fell to 36.2% in April, the lowest since the survey began in 2005. The good news is that a recession in China would help to ease global inflationary pressures.

Fixed Income

  • The Federal Open Market Committee (FOMC) increased the fed funds target rate by 50 basis-points (bp) to 0.75% - 1% and discussed their plans for Quantitative Tightening (QT) at the May meeting. Additional 50bp rate hikes are on the table for the next two Fed meetings, but not 75bp hikes based on Chairman Powell’s remarks, unless the data changes and longer-run inflation expectations become unanchored.
  • The Fed has pivoted from emergency monetary policy to a “neutral” policy, the arbitrary rate determined by the Fed, which causes the economy to neither contract nor expand. If wage gains continue to accelerate and longer-term inflation expectations remain at elevated levels, the Fed may have to pivot from “neutral” to “tight”. That would require a positive real fed funds rate, i.e., the fed funds rate is higher than the inflation rate.
  • Prior to the FOMC meeting, the fed funds futures market was expecting a year-end 3% fed funds rate. Futures have pared back rate hike expectations to a 2.75% fed-funds rate by year-end.
  • With inflation still running hot, bond prices are sliding as the market looks for faster Fed rate hikes. The yield on the 10-year treasury is now over 3%, compared to 1.25% to start the year. As of April 30th, the Bloomberg U.S. Aggregate Bond Index had a total return of -9.50% YTD.

Tactical Fixed Income Allocation

  • Duration below the fixed income strategy’s respective benchmark as rates move higher during the Fed’s battle with inflation.
  • Overweight to short-term investment grade corporates - capture additional income with marginal incremental risk.

Equity

  • The S&P 500 fell more than 13% between January and April of this year. That is the worst four-month start to a year since 1939.
  • The S&P 500 valuation multiples continue to compress, particularly those known as the MegaCap-8—i.e., Alphabet, Amazon, Apple, Meta, Microsoft, Netflix, Nvidia, and Tesla. These 8 stocks currently account for about 22% of the S&P 500’s market cap (down from a recent record high of 25%). Their collective forward P/E was recently down to 25.4. During 2020-21, it mostly ranged between 30.0-38.0. It is now below its pre-pandemic peak of 29.0.
  • According to Strategas, the S&P 500 has traded in a range greater than 1% in 87% of 2022’s trading days. Less than 45% of these trading days have been positive. Until the markets get greater visibility on inflation, Fed rate hikes, the war in Ukraine, energy prices, stability in China, and supply-chain bottlenecks, we expect headwinds for equities and market volatility to remain elevated.

Tactical Equity Allocation

  • Overweight to U.S. Large Cap stocks with a slight emphasis on quality growth stocks.
  • Remain underweight International Developed and Emerging Markets (EM), although valuations remain attractive relative to U.S. equities. International Developed and EM may be pressured by the change in globalization, global growth slowing, and the U.S. dollar at a 20-year high relative to a basket of international currencies.
  • Exposure to gold in an environment of high inflation, negative real interest rates, and geopolitical tensions.

Notices & Disclosures
Past performance is no guarantee of future results. Products and services offered through F.N.B. Investment Advisors, Inc. are not FDIC insured; and are not insured by any Federal Government Agency, are not deposits or obligations of or guaranteed by First National Bank of Pennsylvania or its affiliates and may go down in value. The material has been extracted from various sources that F.N.B. Investment Advisors, Inc. believes reliable, but we cannot guarantee the accuracy or integrity of the material. This material is for your private information, and we are not soliciting any action based upon it. Any projections, market outlooks or estimates contained herein are forward-looking statements and are based upon certain assumptions. Other events that were not considered may occur and may significantly affect the returns or performance of these investments. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly herein will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice. To the extent that a reader has any questions regarding the applicability above to his/her individual situation of any specific issue discussed, he/she is encouraged to consult with their investment advisor. You can review your registered investment advisors or the investment advisory firm at the SEC's Investment Adviser Public Disclosure page - http://www.adviserinfo.sec.gov/IAPD/Default.aspx.

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