Stocks Have A Tough First Quarter – Equity Overview

The yield on the 10-year Treasury bond rose above the S&P 500 Index yield in March, meaning that the 2.32% yield on the 10 year Treasury bond is more than the 1.32% dividend yield for the S&P 500 Equity Index. Some analysts believe that current earnings estimates for the S&P 500 Index, which represents a wide swath of the equities market, may be distorted. Almost all of the growth in 2022 earnings for the index since the beginning of the year can be traced to the energy sector alone.

Major equity indices recouped some ground in March, with the S&P 500 Index, Dow Jones Industrial Average, and the Nasdaq all having a positive month. First-quarter returns were not as generous, as all three indices saw negative performance with the worst quarter in two years. Some analysts are skeptical if an upward trajectory will continue, while others see fundamental optimism surrounding earnings and economic growth, both of which affect stock prices. (Sources: S&P, Treasury, Dow Jones, Nasdaq)

Rates On The Rise – Fixed Income Overview

Global bond yields rose in March, which means global bond prices were down, as European and Asian central banks concurrently raised rates to help stifle global inflation. The Fed began to raise rates in March, with its first of perhaps six additional increases this year. Even though the increases are minimal, each increase affects the overall bond market. Treasury and corporate bond yields rose following the Fed’s move, with the anticipation of a continued higher rate environment

towards the end of the year.

Shorter-term Treasury bonds have begun to yield more than some longer-term Treasury bond maturities. Known as an inversion, economists and bond analysts view such a dynamic as indicative of a recessionary environment sometime in the future. But how high can U.S. rates go? According to the Committee for a Responsible Federal Budget: “Higher interest rates will mean higher interest payments and deficits. For example, if interest rates were one percentage point higher than projected for all of 2021, interest costs would total $530 billion — more than the cost of Medicaid. If rates were two percentage points higher, interest costs would total $750 billion, which is more than the federal government spends on defense or Medicare. And at three percentage points higher, interest costs would total $975 billion — almost as much as is spent on Social Security benefits. On a per-household basis, a one percentage point increase in the interest rate would increase costs by $1,805, to $4,210.” SO, there seems to be a short ceiling as to how high rates can go. (Sources: Treasury, Federal Reserve, How High Are Federal Interest Payments? | Committee for a Responsible Federal Budget, 2022)

Food & Gasoline Making Up More Of Consumer Expenditures – Consumer Inflation

Food and energy have become the two fastest rising expenses for consumers nationwide, as well as representing a larger proportion of total living costs. Currently, 21.5% of the Consumer Price Index (CPI) is composed of food and energy expenditures, where the cost of groceries alone was 6.5% higher and the price of gasoline 50.8% higher than a year ago.

The concern that many economists have identified is that as millions of Americans are spending more on food and energy, they have less to spend on what they’d truly desire or want, also known as discretionary goods. As funds for discretionary items become scarce, economic growth suffers as sales of cars, furniture, clothing, and dining out become less affordable for millions of consumers.

Historically, food and energy prices have always been very volatile, making up more or less of consumer expenditures over time. Where consumers live and how old they also dictate how influential components of the CPI are. Gasoline for example is less expensive in Oklahoma than in California, and seniors may not spend any funds on education but may spend more on medical expenses. (Sources: Dept. of Labor, BLS)

What Is Stagflation – Inflation Overview

Becoming more of a topic throughout the financial media is stagflation, characterized as an environment with minimal economic growth, inflation, and elevated unemployment. The last time the U.S. experienced stagflation was in the late 1970s and early 1980s, with only a small portion of consumers remembering what it was like. According to the Mise Institute, “the essence of inflation is not a general rise in prices but an increase in the supply of money, which in turns sets in motion a general increase in the prices of goods and services.” And, “because the prices of goods are rising faster than those of services, profit margins are narrowing, in turn discouraging production in some areas and contributing to stagflation.“(Source: Federal Reserve Bank of Kansas City, Kanopiadmin. (2002, March 6). Defining inflation: Frank Shostak. Mises Institute. Retrieved April 6, 2022, from https://mises.org/library/defining-inflation, Ryan. (2022, February 5). Death by inflation or by interest rate hikes?: Daniel Fernández Méndez. Mises Institute. Retrieved April 6, 2022, from https://mises.org/wire/death-inflation-or-interest-rate-hikes)