Market Outlook · April 29, 2022

Making Sense: April Highlights

Brent Ciliano

CFA | SVP, Chief Investment Officer

Phillip Neuhart

SVP, Director of Market and Economic Research

Making Sense: April Highlights webinar replay

Amy: Hello, everyone, and welcome to the First Citizens Wealth Management Webinar Series, Making Sense, where Chief Investment Officer Brent Ciliano and Director of Economic and Market Research Phillip Neuhart help you make sense of what's going on in the markets and the economy. I'm Amy Thomas, a Strategist with First Citizens Bank. While everyone's logging in, I want to share a couple of housekeeping items with you. First, this webinar is being recorded, and a replay will be sent to you following today's conference. Secondly, this webinar is interactive. You'll have the opportunity to ask questions. If you submitted a question during the registration process, thank you. Your question is in queue. If you have a question during today's call, please use the Q&A or chat feature to submit your question on the right-hand side of your screen. All questions are confidential and only visible to myself and the panelists. I do want to remind you that we try to keep our discussion broad so if you have a specific question about your financial plan or we don't get to answer your question during today's webinar, please reach out to your First Citizens partner. As a reminder, the information you're about to hear are the views and opinions of First Citizens Bank and should be considered for educational purposes only. If you have any concerns regarding this information, we ask that you reach out to your First Citizens Relationship Manager. Brent, with that, we're ready to go, so I will kick it over to you to get us started.

Brent: Great. Well, thank you, Amy, and good afternoon, everyone. I hope all of you are well. I cannot believe that we are about to start May. This year is just flying by. From a market perspective, what a crazy and volatile start to the year it's been. The S&P 500 began the year falling 13% through March 8th. It subsequently rebounded 11% through March 29th only to fall back 10%, leaving us down 12% year to date. What a nauseous and wild ride it's been. On the fixed income side, we highlighted last month how the first quarter was the worst quarter for Treasury bonds since the first quarter of 1980. Well, folks, as of the end of last week, it is now the worst start for bonds since 1900. Specific to this month's call, Phil and I are going to give you an update on US economic growth, progress in the labor market, the state of the US consumer, corporate earnings and profitability, as well as rates and inflation like we always do. Then for our focus topic of the month, we're going to highlight both residential and commercial real estate markets. Finally, we'll wrap up by giving you our bottom-line views on the markets for both this year, as well as the rest of this market cycle. So let's jump in and get started.

So after unprecedented fiscal and monetary policy stimulus that helped pull us out of the depths of the pandemic, and you can see the juxtaposition between the extreme downturn and the gray bars and the subsequent recovery, the US economy is now about to enter a new phase in this economic cycle, and that's one of lower growth. Consensus expectations for this year are looking at 3.2% growth. For 2023 2.1% and for 2024 2%. But we need to pause for a minute. What does that actually mean? Let's put this into perspective. So the 20-year growth rate for our country is about 1.9%. The 50-year growth rate is 2.7%. So despite rampant inflation, global supply chain issues and a Fed that's about to significantly and materially change their policy stance, we're expected to grow 1.3% higher than the 20-year average. About half a percent higher than the 50-year average. Even for 2023 and 2024, we're growing or expected to grow at or above trend, while analysts can certainly change their viewpoints, at least in the current consensus data that we're looking at, no signs of a recession right now. The shining star of our economy is certainly our labor market, and the pandemic gave rise to the sharpest labor market contraction in the history of our country. We lost 22.4 million jobs in only two months, March and April of 2020. The unemployment rate skyrocketed to 14.7%. Since then, the labor market has come roaring back, and as of the end of March, the unemployment rate is sitting at a low 3.6%. Consensus expectations have that unemployment rate at 3.3% by the end of this year. Additionally, last week, the Department of Labor reported that we now have the fewest number of Americans claiming unemployment since the early 1970s. And despite this incredible recovery in the unemployment rate, and you can see that graph on the right-hand side, we still have a record 11.2 million open and unfilled jobs, which is sitting at all-time highs. That's a little bit more than 3 million jobs above the pre-pandemic high in 2019. Labor force participation is also improved, and we're showing you that on the left here. And if I boil it down pre-pandemic, in February of 2019, we employed 152.5 million people. We fell to 130. We are now back at 150.9 million people working. Only 1.6 million people shy of that pre-pandemic record. And folks, we added 1.7 million jobs in the first quarter alone. So this labor market is well on its way to more than a full recovery. On the left, we're showing you that employee wages and average hourly earnings are still rising at about a little bit more than 5% year over year growth. That's great to see, but unfortunately when I adjust that for real wage growth, we're still looking at employees seeing their wages contracting by about 3%. Even with this good labor market story, the consumer is still facing this incredible wall of worry—rampant inflation, supply chain bottlenecks. We still have the war in Ukraine and political environment at home, were some of the reasons cited in the University of Michigan Consumer Sentiment survey. And you can see on the graph that consumer sentiment fell to the lowest level since 2011 at the end of March. The good news is in the April print, we saw it pop back up from 59.4 up to 65.7 so just maybe we've seen the bottom in consumer sentiment and what you can see on the right-hand graph, which is the most important graph in the context of the labor market in the US consumer, is that consumers are still spending. Personal consumption expenditures on both services and goods is still remaining high and still growing. And remember, 68% of US real GDP is consumption, another 4.7% is housing. So a total of 72% of US real GDP is driven by the consumer. So as goes the consumer, as goes our economy.

So let's shift gears and talk about corporate earnings and profitability. This is a huge and very busy week for earnings. A full one-third of companies report earnings this week and despite everything that I just talked about with inflation and geopolitical concerns and supply chain bottlenecks, Q1 earnings have actually been revised up 1.9% to 6.6% versus the 4.7% level expected in March of this year, the end of March of this year. More importantly, consensus is now expecting full year earnings growth of 10.6%, which is a full 1.2% higher than the expectations as of the end of the first quarter, as well as analysts' expectations at the end of this year. So despite all the noise and everything that's going on, corporate earnings and profitability for now remain solid. On the right-hand graph, which is really important, what we're looking at is the estimated next 12 months operating margins for the S&P 500, so not operating margins today, but the expected operating margins in the next 12 months. And what you can see on the graph is while it's coming down a little bit, operating estimated operating margins over the next 12 months are still expected to be at a robust 17%. So as good as the earnings story has been, inflationary and supply chain pressures still remain high and are likely to slow earnings and revenue growth until these pressures materially abate. And on the right-hand side, you can see ISM Manufacturing Order backlogs are starting at the margin to see improvement. But folks, still extremely high versus history. Additionally, these graphs aren't capturing the full impact of the war in Ukraine, as well as China's port shutdowns due to COVID restrictions. The good news is that you started to go through some of the earnings reports specifically for one of our larger automakers starting to see abatement in the chip shortage in some of those things starting to ease up. Time will tell how fast we get through some of these supply chain disruptions.

Phil: And when you think about supply chains and everything else that's happening in the economy, you don't need us to tell you that inflation is high. As you can see here, whether you're looking at consumer or producer prices, both are at multi-decade highs or, of course, feeling this pain within the economy and possibly worse news for the Federal Reserve, if we turn to the next slide, is captured in rising inflation expectations. We're showing this on the left side here. Now, a silver lining, if you look at the two lines, is that longer term three-year-ahead expectations are below the one-year expectation. That's good news, but both levels remain elevated. This is a problem for the Federal Reserve. More on that in a moment. As the right chart shows, the pace of inflation will likely moderate in coming quarters from the current extreme highs. But the absolute level will remain high well into next year and well above the Fed's 2% level, so inflation is here to stay for some time. And because of that fact, the Federal Reserve is playing catch up. The futures market believes the Fed will need to be even more aggressive than their projections indicate as we're showing here. The market is pricing above a 2.5% Fed funds rate by year end. Now, looking ahead to the May 4th FOMC meeting, which is next week, the market is pricing 97% chance the Fed increases rates by 0.5% in that meeting. That compares to a quarter point increase in March. It's important to note that both the Fed and markets tend to get projections wrong in terms of the number of hikes. But the real story here is the Fed is now moving. It's about the direction of where they're going. The Fed was late to the game but is now being forced to hike rates aggressively.

Now, coming into this year, it wasn't just the Fed that was caught flat footed. Fixed income markets have had to price further Fed action in a matter of just a few months, as you can see here on the left side. Treasury yields have increased rapidly in both shorter-term rates, like the 2-year Treasury and longer rates like the 10-year Treasury. But the short-term rates have risen faster than long rates, making the spread between 2- and 10-year contract rapidly. We're showing this on the right side. In fact, a few weeks ago, the spread turned negative, meaning the 2-year yield exceeded the 10-year yield. This is also referred to as yield curve inversion. So as it relates to inflation, the Fed, interest rates, we believe a few things. One, the Fed will hike numerous times this year but will not reach the higher end of market expectations that we showed previously. Two, inflation will moderate later this year, but will remain very elevated. So moderation does not mean inflation is at a good level. It's still going to be too high. Three, bond yields have adjusted significantly in advance of Fed action, so it is not a certainty that Treasury yields will continue to move up in a straight line. Now, given what we've covered, you might be asking, are we going into a recession or not? As we stated in last month's webinar, we believe a few things. First, the US economy is slowing and inflationary pressures remain high. And while the risk of recession has risen, that's a certainty, the risk has certainly risen, we do not have a recession in our base case for the next 12 months. We do think we are entering a mid-cycle slowdown. Now, if we're wrong and the economy slips into a technical recession, the good news is a few things. First, the strong labor market as Brent covered, second, as Brent also covered record corporate earnings. Both of these factors would provide some cushion, in our view.

So let's now turn to real estate. Coming up in every client meeting we do, I want to dig in for a moment on this. So much like inflation, everyone on this call is well aware that the US housing market is extremely hot with tight supply demand dynamics. That is not news to anyone. Affordability has declined as mortgage rates shown on the left here shoot higher. Mortgage rates are now around 5.4%. Think about where that was just a year ago, and also home price appreciation has skyrocketed and is currently near 20% year over year, as you can see on the right side, we actually received some updated data on that yesterday. These two factors are working in concert to eventually slow the housing market. We all are well aware that 20% price appreciation is not sustainable. But for now, the train keeps rolling to keep up with demand, which continues to outstrip supply. Home construction is on the rise. Housing Starts shown here are currently at their highest level since 2006, which was the last housing boom as homebuilders try to keep up with this excess demand. And to that point, looking at the existing home market, supply versus demand remains tighter than at any point during the last housing boom earlier in the 2000s. Month's Supply of Homes, which we're showing you here, this refers to the number of months it would take for the current supply of homes on the market to sell, given the current pace of sales. So it is a good measure of supply versus demand and confirms what we are seeing in our local markets. Supply is extremely constrained and that's helping to prop up the housing market. We turn to commercial construction. It has joined in with the residential side, you can see on the left side here, non-residential construction has seen a material increase after the big contraction early in the pandemic. On the right side, you can see commercial property prices have rebounded sharply, much like the residential market. However, we have seen a recent dip in appreciation as cap rates have fallen. When we step back and think about the real estate market and where it might be going and in our base case, price appreciation slows in coming quarters as supply and demand come back in line. Now, in the near term, supply remains incredibly constrained and there's still a big backlog of demand. So this slowdown is likely not immediate. It's coming, though, and the less likely bear case further down the road, low affordability worsens through continued record price appreciation, combined with rates moving even higher. In this case, just as Housing Starts peak, demand is also deteriorating. This is the scenario in which prices could all out fall in certain regions of the country. Again, this is not our base case, but it is a possibility.

Brent: So there's an awful lot going on in both equity and fixed income markets, so why don't we jump right in? And so before we get into where markets might go from here, I wanted to pause for a moment and talk about where we are today. I'm going to update some of these numbers on the fly and as I mentioned in my opening comments, fears surrounding a multi-decade high of inflation, global supply chain issues and this massive turn in expected Fed policy actions has sent the S&P 500 down 12.3% year to date through March 8th, rallied back up 10% through March 29th and now fallen back 11% through Monday of this week, which leaves the S&P 500 down at about 12%. Before today's trading started, we were only about 5 points on the S&P 500 off of the intra-year low. Big picture, volatility, folks, is certainly back. Over 85% of the 78 trading days so far in 2022 have seen the S&P 500 trade in at least a 1% daily range. On the right-hand side, I think you can see that despite the market selling off the PE multiple or the market's valuation has decreased significantly. While you can see, despite the sell off, earnings growth year to date is a positive 5.7%. So again, you know, double positive here. Earnings growth growing faster than we expected and the market is now trading at about 18.2 times forward earnings, which it makes it much cheaper than it was at the beginning of this year and significantly cheaper than what it was at the beginning of 2021 and the end of 2021. So what I wanted to do is I wanted to give you six historical reasons why stocks could be higher over the next 12 to 24 months.

So first is looking at the last 29 major global conflicts and events post 1939. The S&P 500 has seen double-digit returns 12 months post, with an average of plus 13% and a median return of plus 14%. Additionally, when we exclude the four events that occurred while the US economy was already in recession, the S&P 500 was higher, almost 100% of observations 12 months forward. The second is, the S&P 500 has been higher 12 and 24 months post the Fed's first rate hike of a new rate hiking cycle. Additionally, over the last seven rate hiking cycles over the last 30 years, so basically post 1990, US stocks have been positive 100% of occurrences with an average cycle return of plus 17%. So despite what tends to get mentioned in the financial news media, historically, rising bond yields have not negatively impact stock returns. Certainly a lot to contemplate, given the severity of what we might be looking at and some of the hiking cycles pre-1990, where the Fed was very aggressive to combat higher inflation, which has sort of mixed forward returns but by and large has been usually a positive for stock markets. The third is, as Phil was just highlighting that yield curve inversion, the S&P 500 returns have typically been positive in the 2 years following yield curve inversion. So while yield curve inversion has historically portended a recession on average 20 months after inversion, the market leading up to that point has historically been constructive. The S&P 500 has returned a median return of plus 9% over the subsequent 12 months and plus 16% over the subsequent 24 months. The fourth is following periods of high uncertainty, and when it comes to geopolitical risk and uncertainty, there is a fundamental misconception amongst investors that higher levels of uncertainty spell trouble for markets. As a forward indicator, higher levels of uncertainty have yielded higher forward market returns, not lower. And trust me, I understand how counterintuitive it sounds. But extremely elevated levels of policy uncertainty are more found near market lows than market peaks and the S&P 500 returns following elevated economic and policy uncertainty readings have historically seen significantly higher forward returns 1, 3, 6 and 12 months post. Number five is this year is a midterm election year, and we highlighted this on the last handful of monthly WebEx's and the two things that midterm elections have going on are the following. One, they tend to be very, very volatile. Well, check that box. But also the 12 months following midterm elections, the US stock market has been positive 100% of occurrences since 1950, with an average cycle return of 15.1%. Lastly, at number six, let's talk stock returns during a presidential cycle. Looking at data from 1981 through today, S&P 500 returns during the third year of a newly elected president, and we're talking third year, that would be 2023, we've seen an average return for the S&P 500 of plus 22.2%, almost four times higher than the average of years one two or year four in a presidential cycle. So again, so just six historical reasons why we believe stocks may be higher. Certainly, anything can and will change, and history doesn't always repeat, but it tends to rhyme. So let's all cross our fingers and hope that some of these historical reasons portend future observations. So speaking of midterm elections, a lot of clients have been asking Phil and I, when might we see a bottom in all of this market volatility? Well, historically during midterm election years since 1950, market bottom saw August as that low and looking at the average market recovery from that low, look at that bottom number. When you look at recoveries from that low, you're looking at an average return of 33% from the market lows 12 months forward. And when you look at all that data since 1950 the lowest return that we've seen is positive 8.7%. So again, history doesn't always repeat itself, but let's hope this time it rhymes.

Phil: Absolutely so let's switch gears to fixed income, and as Brent mentioned in his introductory remarks, this is the worst start to a year for bonds since 1900. You can see the returns by various fixed income markets listed here in red. Clearly, a lot has been priced in at this point, as we discussed earlier. The good news is that when bond prices fall, yield to maturity rises so there's always two sides to the coin when it comes to fixed income, and you can see that in the middle columns here. And thus expect a return in fixed income, because of these higher yields has improved this year for those interested in fixed income investing today. For example, investment grade corporate bonds are now yielding 4.25%, that's nearly 2% higher than at the end of last year, which is, of course, just a few months ago. Now, switching back to the stock market, looking at the long term and the 96 years since 1926 the SP 500 has averaged a 10.5% annual return. And although stock market returns fluctuate, the SP 500 index produced positive returns 74% of the time, with an average gain over 21% in those years. Now, in 26% of the years, the return was negative and in those years the average loss was 13%. Additionally, we've seen only six negative calendar years in which the loss was greater than 20% in this wide time span. Only four of those years post the Great Depression, so generally more often than not, the market gains. Additionally, historically, drawdowns have been good entry points. Looking at dates since 1936 here, the S&P has positive returns in 53% of trading days. So you think, oh, that's a little bit over half, but that number increases as you expand your time window. For example, over rolling 5-year periods, the S&P has positive returns over 92% of the time when you look back over a 5-year period over 9/10 of the time, and when you look over rolling 10-year periods on the far right here, that number increases to over 97% of the time, so it's very difficult to time markets. We don't think we can do it. We don't think you can either. But history has taught us that over the long term, investors do win. Now, for Brent and I, this is an incredibly important slide, so we're looking at the average market recovery time from 5% to 10%, 10% to 15% and 15% to 20% drawdowns since 1928. That's the gray bar since 1928, as well as since the great financial crisis. That's the blue bars here. The bottom line is that drawdowns of 20% or less fully resolved themselves quickly. On average, 10% or less recovered fully inside of 6 months as you can see here on the left side, 10% to 15% recovered fully inside of 9 months and 15% to 20% drawdowns effectively recovered within 12 months, which is in the right set of bars here. Now since the financial crisis, the blue bars, the recovery time was even shorter, so quicker recoveries from these drawdowns. So market volatility is unpleasant, but it usually doesn't last long, and reacting to these falls and moving away from your needed asset allocation can be detrimental.

Brent: So let's bring this home, and let's get to our bottom-line viewpoint, so before we give you our viewpoint, let me tell you where the consensus is of the 56 firms that put their viewpoints for the next 12 months in. Right now, consensus expectations has the next 12 month return for the S&P 500 at an index level of 5,265, which would be more than 20% return from last Thursday's close of about 4,393, which is just an incredible number. And one that Phil and I both believe is likely to be revised down. In our last meeting, we talked about historically, consensus 12-month force price targets and expected returns on average have been revised down about 7.7% on average, again, so even if you adjust this 19.9% return for that forecast there, that's still a robust price target that many market participants believe will likely occur. What do we believe? And we said this back in December 15th of last year when we did our 2022 outlook, we believe that this year will end at about 4,900 which will be about a 3% year-over-year growth. How did we arrive at that? 8% to 10% earnings growth and about 5 to 7 multiple contraction gets you to about 3% growth, and we said it was going to be a much more volatile year and in fact, it is a much more volatile year. Full cycle, we believe that the market can last at least through the end of 2023, maybe the first half of 2024 before the cycle turns, and we potentially believe that the market can reach as high as between 5,200 and 5,500. And I know that sounds like a lot given what we've seen from a volatility perspective, but just remember this, we recovered 10% off of this year's low in only 15 trading days so markets can move very fast. How do we arrive at that 5,200 to 5,500 range? Well, if we take 2024 expected earnings of $271 per share, and I apply a market multiple of about 19 times, that gets you to that 5,100 5,200 range. Right now, even after all that sell off that we've seen in the markets, we're trading at a market multiple of about 18.2 times right now today. Usually at the end of market cycles, multiples melt up, not deteriorate. So again, much can and will change and we're going to stay very tight with all of you as it relates to our forecast. But right now, we are constructive on this full cycle, and we are constructive for the rest of this year, certainly not as aggressive as market consensus, but constructive nonetheless. So Amy, I'm looking at all the questions coming into the queue. Why don't we pause here and open it up for Q&A?

Amy: Yes, thank you, Brent, we've got a number of questions already lined up, as you mentioned. Let's go ahead and kick off though, we'll start with this one. I think it's the number one question on everyone's mind. You and Phil both mentioned it, but it probably bears repeating, can you please address our thoughts on a coming recession? And if one should hit what could be the expected impact?

Brent: Sure. Well, I mean, Phil covered it very succinctly. A recession is not our base case. It's also not the base case of consensus as I walked through that data. Expectations for, you know, whether it's, you know, even one quarter of negative real GDP growth, let alone two consecutive quarters of negative real GDP growth, and I know there are certainly other mechanisms that the NBER uses to determine a recession, but I really want to highlight what Phil said, which is critically important. It's hard to see a recession when you have the best labor market in more than 50 years. It's hard to see a recession when wages are growing in excess of 5%. It's hard to see a recession when you see double-digit earnings growth. And again, remember the long-term earnings growth for S&P 500 companies over the last 50 years is 6%. So even if we fall down from 10% to something lower, you're still growing in line with averages. And remember, and for many of you on this phone that run companies or senior execs, how difficult has it been to find, hire or retain employees? Incredibly difficult, incredibly tight labor market. So we believe companies this time around, even if things get tight, are going to be much more reluctant to cut staff and/or decrease wages in an environment where it was incredibly difficult to actually bring in employees to begin with. You know, you're always going to have a recession. Remember, the economy is cyclical, but we just don't see a recession this year. And quite frankly, we don't see a recession before the end of the first half of 2023 either.

Amy: Thank you, Brent. With that in mind, do you think that markets will finish up or down or flat at the end of 2022?

Brent: Yeah, as we said, we came into this year expecting the markets to be up 3% year over year from 2021. We got a lot of ground to cover, right? We've got about what, 17% to get back to flat. Like I said, the markets can, you know, respond and move very, very quickly. We do believe that the markets will finish this year slightly up. More importantly, think about what we just said as far as where we think the entire cycle goes. You can't really think about investing for a quarter or the rest of this year, as Phil talked about. When we think about the constructive nature of equity markets over rolling 3 years, 5 years, 10 years. That's what you're investing for. Trying to time markets for the short term is a futile exercise, and very, very few if any can do it effectively.

Amy: Brent, with inflation rising and continuing to go up, what are our thoughts on long-term inflation outlooks, its impact on the US dollar and treasuries over 1 to 3 years?

Brent: Yeah, absolutely. I'm going to start in the reverse order. Let's talk about the Treasury market and fixed income market. It is hard to see bonds sell off the way that they have. But folks, this is what we've been hoping and praying for. We have been talking about an environment of lower for longer and allocation in a portfolio that wasn't going to do much for you. You know, a 1, 2% return is just not going to get the job done, right? So we now find ourselves in an environment where yields are materially higher. And what that portends for forward expected returns is that part of your portfolio is likely to do much better over the coming decade than expectations were some, you know, 3, 6 or 12 months ago. From an outlook, from a Treasury perspective, I'm going to go out on a limb and say that 2 years from now, 1.5 to 2 years from now, buying into treasuries at any yield this year, you're going to look back as a good idea. Now, certainly anything can change, but the 15-year average yield for the 10-year has been about 2%. We just broached 3%. Expectations are that we're going to probably stay around this level, potentially get to as high as maybe 3.25%, and that's where consensus is right now. By and large, we believe that Treasury yields are higher and the expectation for total return as far as income and capital appreciation for the Treasury markets over the next 3 years is a much, much better outlook than it was some months ago. From a US dollar perspective, the US dollar has just been crushing everybody, whether that's, you know, developed markets or emerging markets. And when you think about it, and I'm not going to get real technical, but there's this concept called, you know, interest rate parity that looks at the difference between interest rate and inflation differentials and currency differentials. And it basically says that countries with higher inflation rates, higher interest rates should have that be reflected in their currencies. We've seen a major appreciation. We think that that's going to start to moderate as we get into the second half of this year and into 2023. But by and large, we think that the dollar is going to remain solid for the coming quarters. I'm going to let Phil answer the one as far as inflation.

Phil: Yeah, And I saw another question as well that they'll sort of tie-in. And the question is basically, will inflation rise further than 8%? So our most recent CPI consumer price index print was 8 and 1/2 year on year, headline inflation that was for March. We think that is likely the peak. That's thanks in large part to the base effect of comparing to an already inflationary environment last year. Right, so inflation was spiking last year. You compare to that all of a sudden your base effect starts to bring things more in line. But as we showed, just because the pace slows does not mean we're anywhere close to a healthy inflation level. We're still potentially going to see inflation in the 5% to 6% range in the fourth quarter of the year. That would be an incredibly high number if I told you that a couple of years ago or even 18 months ago, so not a good level. Still, obviously a problem, something we're hearing repeatedly from business leaders in terms of, and consumers, in terms of our client base. But we do think that 8 and 1/2 is likely to peak. If we're wrong, why would we look back and say we were wrong? One, continued issues from ports in China, other supply disruptions like that and then additionally, further geopolitical issues. So you think about the unexpected war in Ukraine, not something someone was expecting coming into this year if something like that were going to happen and caused further disruptions. That's where we would be wrong on that call.

Amy: So, Phil, the Fed is meeting next week, as you know, and it's widely expected that they'll raise rates by a half a percent. Can you talk a little bit about how their action and taking, raising that rate and how that might impact inflation for the average consumer?

Phil: Yeah so what is the Fed trying to do, right? They're trying to dampen inflation, cool the economy a bit and thereby from cooling the economy, what does that do? That should dampen demand, right? So you dampen demand, supply, demand come more in line and that brings down inflation. The issue that the Fed has is there's things that they control and things they don't control, right? They can control the overnight rate, they control their balance sheet. There's things they can do. They don't control semiconductor production in Taiwan, they don't control port policy in China, they don't control wars in Eastern Europe. So while they can have an impact and certainly we and consensus think that they can, I think a lot of this inflation is not really controlled by monetary policy, and that is a real challenge the Fed has and something they got wrong coming out of this cycle was that when you have, a sort of fully closed global economy, something we've not seen in our lifetimes, to one that reopens, supply constraints really become a major issue. And they continue. So they're trying to cool the economy. But the truth of the matter is increasing the overnight rate, reducing your balance sheet alone does not solve the issues we're seeing with inflation.

Amy: So, Brett, staying on inflation, what is the interplay between inflation and the Great Resignation? Is the erosion of salaries exacerbating the situation, in your opinion?

Brent: Yeah, I mean, it is interesting. I don't think anybody expected that after that incredible labor market contraction that I highlighted on the earlier slides. I mean, when you look at 22.4 million jobs lost and you go back through any of the data sets, I mean, it's like comparing Mount Everest to a molehill and the extent to which we are able to quickly recover, and again, a lot of it had to do with fiscal and monetary policy stimulus, which helped bring things back in line. Certainly, the St Louis Fed did highlight that we lost about 3.149 million people between the ages of 55 and 65 to the, sort of that Great Resignation. I do find it interesting that we are now back at 150.9 million workers. We're going to get back to pre-pandemic levels of employment and corporations are saying it ain't enough. We still have 11.2 million jobs open. Where did all these jobs come from, right? If we already put it back, you know, so could it be because corporate earnings and profitability created new jobs and openings, companies are growing? So there's a lot to evaluate and study. And I definitely believe going forward from here the next 5, 10 years, we're going to be reflecting back and studying this period of time as one of the seminal case studies and understanding how the labor market works relative to jobs and job openings. But I don't think inflation has an awful lot to do with what's going on as it relates to the labor market, per say, as it relates to jobs coming back, right because we had significant repair in the labor market before anyone was talking about inflation, right? Certainly, when it comes to wages, right, we all pay real prices, right? When I go to the grocery store or the gas station or my kid's tuition at college, I'm paying with real dollars. So absolutely, it is important for us to get inflation under control because to see wages grow at 5.2 percent, which is phenomenal, only to actually then see negative wage growth for consumers is incredibly difficult for people to stomach. It is interesting right now that, and this is an important statistic, 90% of Americans spend $0.99 of every dollar of monthly net income on stuff. And it is interesting that despite everybody complaining about inflation, we all are. I am, Phil is Amy is, we're still spending, right? So it's going to be interesting to see where is that inflection point? Where do things break? When does the consumer say no más, I can't do it anymore? Are we going to be able to get by that peak inflation point and see inflation and prices subside enough to where it doesn't break the consumer and spending? That's the $64,000 question. I don't think we have enough data right now to make that determination, but it is absolutely something that we're watching for.

Amy: Phil, we talked about the real estate market. I've got a couple of questions here on that, so let's switch over to real estate. What is the interest rate that will deter homebuyers? Is it 6, 7, 8%? Will higher rates have an effect on CRE values and cap rates? And if so, what can we expect as rates climb?

Phil: Yeah, it's a great question and higher rates certainly matter in terms of home affordability and of course, that beats the commercial space as well. For now, what we actually think the dominant factor is the extreme price appreciation we're seeing in the real estate market, right? If home values are up 20% and up double digits the year before, so on, so forth, rates going up hurts, but boy, that price appreciation is really hard to overcome. So thanks to these two factors, low affordability will eventually dampen volatility or dampen demand I should say, as we covered, it's hard to say a particular mortgage rate that tips the scale because the number of factors in a given region. Supply versus demand, price, et cetera, it's easy to forget. But as recently as the late 90s, very early 2000s, mortgage rates peaked at 8%. So in a historical context, even a 6% mortgage, which is above where we are today, right, that rate is not all that troubling in any store of historical context, but when you combine it with 20% price appreciation, it does speak to a coming slowdown, which is what we expect as we look into the future. When you think about cap rates, the question which incorporates, look, the denominator is asset value. So as prices continue to rise, expect of return falls and that is what we're seeing for commercial and investment properties. As we always point out, real estate is definitionally regional, so the experience of an investor can vary widely depending on the location. But speaking broadly, expected returns in that space are lower today than 12 or 24 months ago, certainly.

Amy: Phil, thank you so much. Phil, we've got one more question here, I want us to hit if that's okay? It's around corporate earnings season. As you mentioned in your most recent Making Sense: In Brief series, we talked about the keeping an eye on the corporate earnings season. Would you talk a little bit about any surprises you're seeing since earnings have started coming out? There's a lot of talk about CEOs and CFOs being guarded as it relates to the trajectory or the future earnings growth, rather than in previous guidance. Do you have any thoughts there?

Phil: Yeah, it's a great question. Something that you know, we're reading headlines every day. In some, so far looking at data, you know, of the companies that have reported earnings year to date, both earnings and sales have in some, beaten expectations, right? But we've had some pretty notable disappointments, including this week. Some of that has had to do with Russia. Some of that has had to do with supply chains, something we were citing coming into earnings season. But on the other hand, you know, including this morning from a major automaker, we heard some, some really hopeful signs on semiconductor supply. So certainly mixed. Certainly, there's been some big disappointments. On net, we've seen Q1 earnings revised up 1.9 percent, as Brent said. And the reason is that companies are beating on the top line and bottom line. So, so far, a pretty decent earnings season. But definitely some interesting things to watch. In terms of the point on CEOs and CFOs being guarded, I think that is directly related to just a high level of uncertainty, right? I mean, on an earnings call, c-suite has no incentive to say what's going to happen in the back half of the year unless they feel pretty good about it. So again, the automaker today, that's why we like seeing that those sorts of statements aren't made unless you're feeling pretty good. You really want to shoot low and hopefully exceed. I think they're feeling the same uncertainty that our clients are feeling, and that is why you're seeing a guarded result. So, so decent results so far. But you can't ignore the fact that both Russia and supply chain have been a negative factor, but there are some glimmers of hope as well.

Amy: Thank you, Phil, and thank you Brent, for sharing your thoughts and answering questions for us today. We'll go ahead and wrap things up. I want to thank you all for being with us today. If your question wasn't answered, please reach out to your First Citizens partner. Our next market update webinar will be on Wednesday, May 25th at 12 pm Eastern. We also recently launched our Making Sense: In Brief, which is a weekly series released every Monday morning, where Phil gives you two to three things to watch and economic news for the week ahead. Those videos are available on And if you'd like to receive them in your inbox, please reach out to your First Citizens partner to get signed up. You can find all information on all of our commentaries and webinars at, along with some other resources that we think you'll find helpful. On behalf of all of us here First Citizens, I want to thank you for trusting us to bring you this information to help you with your financial decisions. And we hope you have a great rest of the week, and we look forward to seeing you on our next webinar. Thanks, everyone.

The views expressed are those of the author(s) at the time of writing and are subject to change without notice.  First Citizens does not assume any liability for losses that may result from the information in this piece.  This is intended for general educational and informational purposes only and should not be viewed as investment advice or recommendation for a security, investment product or personal investment advice.

Your investments in securities, annuities and insurance are not insured by the FDIC or any other federal government agency and may lose value.  They are not a deposit or other obligation of, or guaranteed by any bank or bank affiliate and are subject to investment risks, including possible loss of the principal amount invested. Past performance does not guarantee future results.

First Citizens Wealth Management is a registered trademark of First Citizens BancShares, Inc.  First Citizens Wealth Management products and services are offered by First-Citizens Bank & Trust Company, Member FDIC; First Citizens Investor Services, Inc., Member  FINRA/SIPC, an SEC-registered broker-dealer and investment advisor; and First Citizens Asset Management, Inc., an SEC-registered investment advisor.

Brokerage and investment advisory services are offered through First Citizens Investor Services, Inc., Member  FINRA/SIPC. First Citizens Asset Management, Inc. provides investment advisory services.

Bank deposit products are offered by First Citizens Bank, Member FDIC.

Six reasons stocks could be higher in the next 12 to 24 months

1 Geopolitical and military events

Looking at the last 29 major global conflicts and events post 1939, the S&P 500 has been positive on average 1, 3, and 12 months post event.

2 First Fed rate hike

The S&P 500 has been higher both 12 and 24 months post the first Fed rate hike of a new hiking cycle.

3 Yield curve inversion

S&P 500 returns have typically been positive in the 2 years following yield curve inversion.

4 Periods of high uncertainty

As a forward indicator, higher levels of uncertainty have yielded higher forward market returns, not lower.

5 Mid-term elections

The 12 months following mid-term elections, the US stock market has been positive 100% of occurrences since 1950, with and average return of more than 15.1%!

6 Third year of first term Presidency

Looking at data from 1981 through today, S&P returns during the 3rd year of a Presidential cycle for a newly elected President (that would be 2023) have seen average returns of 22.2%—almost 4 times higher than the average returns in years 1, 2 and 4.

Rising mortgage rates, skyrocketing home prices—when does it slow down?

  • Affordability has declined as mortgage rates shoot higher—rates are now around 5.4%. Home price appreciation is currently near 20% year over year. These two factors will eventually slow the housing market, according to Bloomberg, Strategas and
  • Housing starts are currently at their highest level since 2006 as homebuilders try to keep up with demand, according to Strategas.
  • In the existing home market, supply versus demand remains tighter than at any point during the last housing boom in the early 2000s, according to Bloomberg.
  • Nonresidential construction has seen a material increase after the big contraction early in the pandemic, according to Strategas.
  • Our base case: Price appreciation slows in coming quarters as supply and demand come back in line. This slowdown isn't likely immediate.
  • Less likely bear market case: Low affordability worsens through continued record price appreciation combined with rates moving even higher. Just as housing starts peak, demand deteriorates. Again, this isn't our base case.

Bottom line for markets

  • Wall Street consensus S&P 500 12-month forward price target is 5,265.87, or 19.9%, return from close on April 21, according to Bloomberg (as of April 22, 2022).
  • Our 2022 S&P 500 price target is 4,900, equating to equal to or more than 3% growth over 2021, but we expect a much more volatile year.
  • We believe the full market cycle can last through year-end 2023, or the first half of 2024, and potentially reach 5,200 to 5,500 greater (2024 EPS of $271 at 19 times to 20.5 times), but much can and will likely change along the way.

This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.

Links to third-party websites may have a privacy policy different from First Citizens Bank and may provide less security than this website. First Citizens Bank and its affiliates are not responsible for the products, services and content on any third-party website.

Your investments in securities, annuities and insurance are not insured by the FDIC or any other federal government agency and may lose value. They are not a deposit or other obligation of, or guaranteed by any bank or bank affiliate and are subject to investment risks, including possible loss of the principal amount invested. Past performance does not guarantee future results.

First Citizens Wealth Management is a registered trademark of First Citizens BancShares, Inc. First Citizens Wealth Management products and services are offered by First-Citizens Bank & Trust Company, Member FDIC; First Citizens Investor Services, Inc., Member FINRA and SIPC, an SEC-registered broker-dealer and investment advisor; and First Citizens Asset Management, Inc., an SEC-registered investment advisor.

Brokerage and investment advisory services are offered through First Citizens Investor Services, Inc., Member FINRA and SIPC. First Citizens Asset Management, Inc. provides investment advisory services.

Bank deposit products are offered by First Citizens Bank, Member FDIC.

See more about First Citizens Investor Services, Inc. and our investment professionals at FINRA BrokerCheck.