Most major indices staged a comeback in March but continue to trade lower compared to all-time highs. The S&P 500 and Dow Jones indices are down 5% from record highs but the Nasdaq Composite has slumped 11% since the start of 2022.
The equity markets are heading into what seems like a volatile Q2. Alternatively, April has historically been the best month for investors. We have seen the indices turn in a weak performance for Q1 which was in fact the worst-performing quarter since the bear market of 2020.
Wall Street was impacted by a string of macroeconomic factors that include rising interest rates, inflation, the war in Ukraine, and supply chain disruptions. However, since the end of World War II, indices have moved higher 70% of the time in the month of April, gaining an average of 1.7% in the process.
The markets expectedly will depend on developments between Russia and Ukraine as well as the decisions undertaken by the Federal Reserve. In fact, the central bank in the U.S. will provide detailed plans to shrink its balance sheet. The Fed already has $9 trillion worth in securities on its books and a reduction will be another step to tighten its policy.
The economic calendar for the week includes factory orders on Monday, international trade and ISM services on Tuesday, and wholesale trade on Friday. The Q1 earnings estimates for companies part of the S&P 500 have been improving in the last month, which is an encouraging sign.
Interest rates and commodity prices to impact S&P 500 in Q2
In the first three months of 2022, the 10-year Treasury yield touched a high of 2.55% and ended the last week at 2.37%. The yield stood at 1.51% at the start of the year. Comparatively, the two-year yield rose to 2.45% from 0.73% in this period.
The bond yields might gain momentum in the near term due to higher inflation numbers but may also consolidate before rising sharply again.
Further, commodity prices and upcoming quarterly results will also be key drivers for equity markets in Q2. With oil prices expected to trend higher, geo-political risks exacerbate pricing and supply chain issues exponentially.
In Q1 of 2022, the West Texas Intermediate oil futures was swinging wildly, before moving higher by 39%, which was its eighth positive quarter in a row and the best ever Q1 since 1999.
The WTI moved below $100 per barrel on Friday.
Should you bet on the energy and commodities sector?
It's quite evident that inflation is not a transitionary headwind. So, equity indices are expected to be choppy and volatile for the rest of 2022. Investors might increase stocks operating in the commodities, energy, and natural gas sectors to benefit from an inflationary environment.
The S&P 500 and other indices are likely to adjust to a hawkish Fed policy against rising employment rates. In March 2022, 431,000 jobs were added and the payroll data continues to trend higher. However, if the Fed increases rates too aggressively, the economy may plunge into recession.
The two-year Treasury yield rose above the 10-year yield, inverting for the first time since 2019 which is a sign of a recession. Additionally, the Fed has signaled balance sheets will be trimmed significantly which caused the yield curve inversion.