2Q22 Newsletter
Market Update
(all values as of 03.31.2022)

Stock Indices:

Dow Jones 34,678
S&P 500 4,530
Nasdaq 14,220

Bond Sector Yields:

2 Yr Treasury 2.28%
10 Yr Treasury 2.32%
10 Yr Municipal 2.23%
High Yield 5.79%

YTD Market Returns:

Dow Jones -4.21%
S&P 500 -4.69%
Nasdaq -9.10%
MSCI-EAFE -6.61%
MSCI-Europe -7.93%
MSCI-Pacific -4.08%
MSCI-Emg Mkt -7.32%
 
US Agg Bond -5.93%
US Corp Bond -7.69%
US Gov’t Bond -6.33%

Commodity Prices:

Gold 1,941
Silver 24.96
Oil (WTI) 100.72

Currencies:

Dollar / Euro 1.11
Dollar / Pound 1.31
Yen / Dollar 121.90
Dollar / Canadian 0.80

Macro Overview / February 2022

Market dynamics are shifting as the Federal Reserve outlines its execution of ending monetary stimulus in order to squash inflationary pressures. Analysts and economists are expecting market volatility to continue as the Federal Reserve prepares to embark on its interest rate increase initiative. Some believe that the Fed will successfully pull off a series of four possible rate increases this year culminating in a “soft landing” whereas a rise in rates to control inflation doesn’t stifle economic expansion.

Inflation reached the highest level in 40 years, annualizing 7% at the end of 2021. Several analysts and economists believe that inflation may be peaking and may actually reverse course in coming months. It is also plausible that the Fed’s rush to raise rates simultaneously as pandemic stimulus funds have evaporated, may slow economic growth more than anticipated and ease inflation precipitously.

Economists are suggesting that the post pandemic inflation the nation is experiencing is not being driven by excessive demand, but by limited supply of goods and workers. Nearly all prior inflationary periods have been driven by excess demand.

Supply constraints are still prevalent throughout the country, caused by multiple factors that neither the administration nor the Federal Reserve can alleviate. As higher prices evolve from the constraints, consumers modify spending behavior in order to accommodate inflationary tensions. The Atlanta Fed GDPNow model projects a substantial pullback in retail spending as consumers exhaust all remaining stimulus funds and minimize expenditures on costly discretionary goods.

Government data is showing that demand is falling faster than supply for various goods and services across the nation, alleviating inflationary tensions. Sales of products and services including furniture, clothes, electronics, appliances, sporting goods, and dining out have fallen over the past few weeks, indicating a slowdown in consumer expenditures.

A growing consensus among economists is the belief that pandemic stimulus funds and low vaccination rates have been the primary factors behind the drop in labor participation and a tight labor market. Wage inflation could eventually subside as more workers return to the workforce, thus helping to mitigate overall inflation pressures.

Financial market volatility intensified in January, as geopolitical tensions coupled with expectations of an imminent Fed rate hike drove equity and bond prices in extreme directions. Major equity and fixed income indices saw price declines in January.

Crude oil prices posted their strongest January in decades as expanding global demand and limited supply propelled prices higher. Rising oil prices have also translated into rising gasoline prices nationwide, with some analysts expecting even higher prices heading into the summer months.

The Census Bureau, via its Household Pulse Survey, found that over 40% of unemployed individuals blame Covid related reasons for their unemployment. The same survey also identified that there were over 3.5 million workers absent from work in January due to illness, a record number. Labor market data has become a focal point for the Federal Reserve and financial markets, as distortions surrounding what the data is relaying about the actual economic health of the economy.

Sources: Fed, Labor Dept., www.census.gov/data/experimental-data-products/household-pulse-survey.html

 
gasoline account for roughly 80% of energy consumption worldwide

How The Russian Conflict Affects Commodities Worldwide – Global Energy Overview

As the world’s third largest exporter of oil and third largest wheat producer, Russia is a global provider of key commodities. The imposed sanctions on Russia affects these markets since essential payment methods have been restricted, thus not allowing Russia to fulfill ongoing transactions.

Ukraine is also a significant source of valuable commodities used for electronics, automobiles, and food products worldwide. In addition to wheat and corn exports, Ukraine also supplies the global markets with rare gasses such as neon, which is used in the production of semiconductors. It also supplies two essential metals for automobile catalytic converters, aluminum and palladium.

According to Eurostat, European countries import about 30% of their petroleum products and about 40% of its natural gas from Russia. Major gas lines make their way across Ukraine from Russia to European countries in the western part of Europe.

The International Energy Agency noted that global oil markets were already tight before the Russian invasion and commercial inventories have been at their lowest levels since 2014, thus compounding global supply constraints.

Sources: Eurostat, IEA

 

How Rising Oil Prices Can Stifle Global Growth – Oil Sector Update

Even as the United States has curbed its appetite for oil and gasoline over the past few years, demand among emerging economies has increased. Fossil fuels, including natural gas, petroleum, crude oil, and gasoline still account for roughly 80% of energy consumption worldwide according to the International Energy Agency.

Since oil is a primary energy source, rising oil prices can quickly translate into higher prices in different parts of the economy. Inflation, as measured by the Consumer Price Index (CPI), is made up of various components, including energy, food, and transportation. These three components represent about 20% of the CPI, all of which are directly affected by oil prices. As a larger portion of consumers’ budgets is spent on these three, the less disposable funds consumers will have to spend on other items.

Crude oil is priced in two primary markets, international Brent and as domestic West Texas Intermediate (WTI). Both are priced per barrel and determined by multiple factors, including production, supply, demand, economic growth, weather, and geo-political issues. Unfortunately, Brent and WTI prices had already been rising due to supply constraint issues and increasing demand. The emergence of the Ukrainian conflict has propelled prices even higher, eclipsing $100 per barrel for Brent in February, a level not reached since 2014.

Sources: IEA, Federal Reserve, Dept. of Energy