Week in Review: US Economy Records a Surprise Contraction

Financial markets shifted their focus from inflation concerns to corporate earnings and a deteriorating outlook for global growth this week. Weaker European economic activity caused by the war in Ukraine, Chinese pandemic lockdowns; and a surprise contraction in first quarter U.S. GDP growth, weighed on stock markets. As a result, U.S. equities revisited the lows of this year, with the S&P 500 now down about 14% and the Nasdaq down 24% from their peaks.

It was a busy week for the first-quarter earnings season in the U.S., with more than one-third of S&P 500 companies reporting results, including Alphabet (Google), Amazon, Apple, Meta (Facebook) and Microsoft which together make up 21% of the S&P 500 Index. In summary, results were mixed:

· Alphabet’s first quarter revenue increased by 23% but missed estimates after the war in Ukraine hurt YouTube ad sales. Alphabet’s board also announced $70 billion in share buybacks.

· Amazon.com delivered a disappointing quarter and outlook, caused by higher costs to run its warehouses to deliver packages to customers. The company surprised investors with its first quarterly loss since 2015, sending its share price down 14% on Friday.

· Apple reported record sales ($97.3bn) and profits ($25bn) for the quarter ahead of market expectations but delivered a more cautious outlook due to lockdowns in China impacting production and the war in Ukraine denting sales. The board increased its dividend by 5% and authorised a $90bn share buyback program.

· Meta posted a profit ahead of consensus, coming in at $2.72 per share compared to estimates of $2.56. The earnings beat was tempered by Meta recording its slowest revenue growth in a decade (7% sales growth to $27.91bn).

· Microsoft reported the strongest results of the tech giants, reporting revenue of $49.36 billion in the quarter, compared with $41.7 billion a year earlier. Net income rose to $2.22 per share from $2.03 per share a year earlier. The company on Tuesday forecast double-digit revenue growth for the next fiscal year, driven by demand for cloud computing services.

The biggest data surprise of the week, came from the U.S. Commerce Department, showing that the U.S. economy contracted at annualised rate of 1.4% in the first quarter, well below consensus expectations of a 1.1% expansion. In the prior quarter, annualised GDP increased by 6.9%. The sharp deceleration was due to weaker exports and a decline in inventory spending following a sizable increase in the prior quarter. But consumer spending, which accounts for nearly 70% of the U.S. economy, continued to grow at a solid pace.

The eurozone economy expanded by 0.2% in the first quarter, as surging commodity prices and disruptions related to Russia’s invasion of Ukraine weighed on growth. This preliminary estimate was less than the 0.3% forecast by the European Commission just before the war started. At the same time, a report from the LSE, indicated that Brexit has caused UK imports from the EU to drop by 25%.

Swedish and Finnish policy makers have agreed to seek entry into the NATO defence bloc simultaneously in mid-May, according to media reports in both Nordic countries. Meanwhile, Russian Foreign Minister Sergei Lavrov accused NATO and its allies of using Ukraine as a proxy to fight with Russia.

In other news, Emmanuel Macron won a second term as president of France, defeating Marine Le Pen, leader of the far-right National Rally party with 58.5% of the vote, compared to 41.45% for Le Pen.

China’s central bank pledged to increase support for the economy, seeking to reassure investors, as the growth outlook for China worsens. The People’s Bank of China “will step up the prudent monetary policy’s support to the real economy”. It reiterated it will keep liquidity reasonably ample. China’s State Council also pledged to promote the growth of internet platform firms. “The healthy development of the platform economy should be facilitated to drive the creation of more jobs,” according to a statement issued after a meeting of the State Council.

Late selling in the U.S. on Friday saw the Dow Jones (-2.47%), S&P 500 (-3.27%) and Nasdaq (-3.93%) all ending the week sharply down. European and Asian markets also ended the week in negative territory with the Euro Stoxx 50 (-0.97%), Nikkei 225 (-0.95%), and Shanghai Composite Index (-1.29%) all softer. The exception was the FTSE 100 (+0.30%) ending the week stronger. The U.S. dollar continued to strengthen this week, with the U.S. Dollar Index, which measures the U.S. currency against a basket of 6 other developed market currencies, increasing by +6.4% year-to-date.

Market Moves of the Week

On Friday, health officials and scientists warned that South Africa may be entering a fifth COVID wave earlier than expected after a sustained rise in infections over the past 14 days that seems to be driven by Omicron sub-variants. Health Minister Joe Phaahla told a briefing that although hospitalisations were picking up there was so far no dramatic change in admissions to intensive care units or deaths.

The JSE All-Share Index managed to end the week in positive territory (+0.24%), supported by the resource sector (+1.16%). Industrial (-0.24%) and financial (-0.90%) shares were weaker. By Friday close, the rand was trading at R15.75 to the U.S. Dollar, having reached a mid-week high of R16.13.

Chart of the Week

Whilst recession and stagflation talk (high inflation, low growth) has surfaced in recent weeks, it felt premature given the current strength of consumer demand and the strong U.S. labour market. That at least was what was believed until the publication of the first gross domestic product growth figures for the U.S. in the first quarter, which showed amazingly that the economy was already shrinking. During the post-Volcker era, going back some four decades now, negative-growth quarters have been very rare. Source: Bloomberg

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.

Our thoughts and prayers are with the victims of this aggression. As always, we appreciate your support and value your trust in StrategiQ Capital.

The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell or an indication of trading intent on behalf of any Strategiq product. Strategiq Capital is an authorised financial services provider (FSP 46624).