Fortis Wealth Management

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April 2022
Market Update
(all values as of 11.30.2023)

Stock Indices:

Dow Jones 35,950
S&P 500 4,567
Nasdaq 14,226

Bond Sector Yields:

2 Yr Treasury 4.73%
10 Yr Treasury 4.37%
10 Yr Municipal 2.68%
High Yield 8.30%

YTD Market Returns:

Dow Jones 8.46%
S&P 500 18.97%
Nasdaq 35.92%
MSCI-Europe 11.19%
MSCI-Pacific 5.94%
MSCI-Emg Mkt 3.21%
US Agg Bond 2.51%
US Corp Bond 4.91%
US Gov’t Bond 2.76%

Commodity Prices:

Gold 2,061
Silver 25.80
Oil (WTI) 75.71


Dollar / Euro 1.09
Dollar / Pound 1.26
Yen / Dollar 147.59
Canadian /Dollar 0.73

Macro Overview

The Russia-Ukraine war exacerbated inflation expectations as it impacted commodity prices and global supply chains. Supply chain issues were already wreaking havoc on global manufacturing, production costs, and consumer availability prior to the Russian invasion.

Consumers holding cash are rapidly losing purchasing power as rising rates and inflation have driven borrowing costs higher for homebuyers and consumers overall. Increased mortgage rates have caused some borrowers to be disqualified on mortgage loans that had previously been approved.

The Federal Reserve initiated its long-awaited rate increase in March, marking the first of several projected increases this year. General consumer loan rates, mortgage rates, and auto loan rates all increased. The Fed’s objective is to counter inflationary pressures by raising rates in order to ease demand for products and services. Economists note that the tremendous spike in global commodity prices is creating commodity-led inflation, which increases costs for production, manufacturing, and transportation.

The high demand for homes nationwide may eventually subside as increased mortgage rates reduce affordability for millions of homebuyers. The average 30-year conforming mortgage rate rose to 4.67% in March, up from a low of 2.66% in December 2020.

Short-term Treasury bond yields moved higher than some long-term Treasury bond yields, which is often interpreted as an indication of a possible economic slowdown. Rising short-term rates reflect inflationary pressures, while lower long-term rates may suggest a future recessionary environment.

A recent strengthening U.S. dollar was the result of global investors seeking stability as the Russian invasion of Ukraine intensified. Optimistically, a stronger dollar can help stem inflation as it makes imported products less costly for American consumers. The most recent inflation data revealed an annual rate of 7.9%, the highest in 40 years, putting pressure on consumers as wages struggle to keep pace with heightened prices.

Gasoline prices have soared more in certain states than others, due in part to gasoline excise taxes. The federal government imposes a tax of 18.4 cents for each gallon sold nationally, and some states impose an additional gas tax to raise funds for state infrastructure and highway projects. While the national average cost of a gallon of gasoline was $4.23 at the end of March, several states saw much higher prices. (Sources: EIA, Federal Reserve, Freddie Mac, U.S. Treasury)

Wages for females were up 4.4% from a year earlier versus a 4.1% increase for men

Stocks Had A Challenging First Quarter – Equity Overview

The yield on 10-year Treasury bonds rose above the S&P 500 Index yield in March, with the 2.32% yield on the 10-year Treasury bond higher than the 1.32% dividend yield for the S&P 500 Equity Index. Some analysts argue that current earnings estimates for the S&P 500 Index, which represents a significant portion of the U.S. equities market, may be distorted. Nearly all of the growth in 2022 earnings for the index since the beginning of the year is attributed to the energy sector. The recent sharp rise in oil and other energy prices have driven profits for oil and energy companies, which aren’t necessarily representative of other sectors.

Major equity indices regained some ground in March, with the S&P 500 Index, Dow Jones Industrial Average and the Nasdaq all experiencing a positive month. Overall first-quarter returns were not as rosy, as all three indices saw negative performance with the worst quarter in two years. Some analysts are skeptical as to whether the upward trajectory will continue, while others see fundamental optimism regarding 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 as European and Asian central banks concurrently raised rates in an attempt to mitigate global inflation. The Federal Reserve raised rates in March, with its first of seven projected increases this year. Each increase affects the bond market; Treasury and corporate bond yields rose following the Fed’s move, with the anticipation of a higher rates throughout the year.

Some short-term Treasury bonds now yield more than some long-term Treasury bond maturities, which is known as an inversion. Economists and bond analysts view this situation as potentially indicative of a recessionary environment sometime in the future. (Sources: Treasury, Federal Reserve)

Women Seeing Bigger Pay Raises Than Men – Labor Market Update

The COVID-19 pandemic presented challenges for many working families, keeping family members home with children as schools and daycares were shuttered. Working parents often stayed home to care for children and other family members, with many even leaving their jobs. As employees returned to work over the past several months, data from the Atlanta Federal Reserve found that women saw higher wage increases than men.

Wages for women were up 4.4% from a year earlier, versus a 4.1% increase for men during the same period. The February data marks six consecutive months that saw wage growth for women outpace wage growth for men, a notable deviation from historic trends. The data also found that women who switched jobs saw larger pay increases than men who switched jobs. (Sources: Dept. of Labor, Atlanta Federal Reserve)

21.5% of the Consumer Price Index is composed of food and energy expenditures

Food & Gasoline Comprising More Of Consumer Expenditures – Consumer Inflation

Food and energy are the two most quickly-rising expenses for consumers, representing a large portion of total living costs. Currently, 21.5% of the Consumer Price Index (CPI) is composed of food and energy expenditures; the cost of groceries are 6.5% higher than a year ago, while the price of gasoline is 50.8% higher.

Economists are concerned that as millions of Americans spend more on food and energy, they have less to spend on discretionary goods. As funds for discretionary expenditures become scarce, economic growth suffers as sales of cars, furniture, clothing, and dining out become less affordable for tens of millions of consumers.

Food and energy prices have historically been volatile, accounting for various proportions of consumer expenditures over time. Consumer location and age influence the relative impactful of different components of the CPI on individuals and families. Gasoline, for example, is less expensive in Oklahoma than in California, and seniors may not spend any money on education but might spend more on medical expenses. (Sources: Dept. of Labor, BLS)

The Threat Of Stagflation – Inflation Overview

Stagflation is characterized as an environment with minimal economic growth, high inflation, and elevated unemployment. The last time the U.S. experienced a stagflationary environment was in the late 1970’s and early 1980’s.

Some economists argue that the inflation we are experiencing today is driven by supply constraints rather than by heightened consumer demand. Periods of inflation have historically evolved from excessive consumer demand supported by expanding wages. Currently, wages are not keeping up with inflation, causing effectively diminished incomes and lower consumer purchasing power.

Should wages fail to keep up with inflation, and economic growth begin to falter, then the risk of stagflation increases. Unemployment may increase concurrently if companies decide to reduce staff and cut positions to adjust for economic contraction. (Source: Federal Reserve Bank of Kansas City)

RMDs can affect taxes on social security benefits

Tax On Social Security In Retirement – Retirement Tax Planning

A prudent and effective tax strategy during employment years will mostly likely need to be modified in retirement. Once earned income decreases or stops and income from retirement plans, investments, and Social Security commence, tax considerations change.

The changes are primarily driven by the types of account that typically provide cash flow in retirement, which include IRAs, 401k plans, and pensions, and which often trigger required minimum distributions (RMDs).

Distributions from tax-deferred retirement accounts such as an IRA or a 401k are generally taxed at the ordinary marginal tax rate. Distributions from a Roth IRA or Roth 401k are tax-free as long as the account has been open for at least five years and the account holder is at least 59.5.

Investment income such as stock dividends and bond interest are taxed differently when they are held outside of a retirement account. Realized gains on stocks that have been held for one year or longer are taxed at a more favorable rate than the marginal income tax rate, which is applied to gains realized on short-term positions held less than one year.

Retirement age brings Social Security payments, which are subject to taxes. Eligibility for Social Security benefit payments begins at age 62, but payments can be postponed until age 70. A key factor to consider in determining the ideal age at which to begin receiving Social Security payments is the amount of retirement assets held in retirement accounts that are subject to RMDs. This is where tax strategies can vary drastically.

Retirees with a significant amount of assets in retirement accounts subject to RMDs, and with non-retirement investment income, may benefit from consulting with a tax professional to decide when to take Social Security. The IRS determines whether taxes are owed on Social Security by the “provisional income” measure. Provisional income includes gross income, tax-free interest, and 50% of Social Security benefits. If the provisional income is above a certain amount, then a portion of the Social Security income becomes taxable.

One way to potentially lower taxes in retirement is to start taking distributions from tax-deferred accounts before it’s required.  Once you reach age 59½, you can withdraw funds from those accounts without paying the 10% early withdrawal penalty.  The withdrawals are taxed as ordinary income, but over time they reduce the size of tax deferred accounts, and thereby reduce the size of RMDs.  Additionally, accessing those funds may help retirees delay taking Social Security benefits, which increases in size when delayed, up to age 70.

A strategy for reducing the potential tax consequences of RMDs is converting a traditional IRA or 401(k) plan into a Roth IRA before the age of 72. A Roth conversion may make sense when you’re certain you’ll be in a higher bracket when you eventually withdraw the money, which is sometimes the case once RMDs and Social Security benefits are factored in. (Sources: Social Security Admin., IRS, Tax Policy Center)