Robert Krueger

Alexander Randolph Advisory Inc.

8200 Greensboro Drive, Suite 1125

McLean, VA 22102

703.734.1507

www.alexanderrandolph.com

January 2022
Market Update
(all values as of 08.31.2022)

Stock Indices:

Dow Jones 31,510
S&P 500 3,955
Nasdaq 11,816

Bond Sector Yields:

2 Yr Treasury 3.45%
10 Yr Treasury 3.15%
10 Yr Municipal 2.61%
High Yield 8.34%

YTD Market Returns:

Dow Jones -13.29%
S&P 500 -17.02%
Nasdaq -24.47%
MSCI-EAFE -21.21%
MSCI-Europe -23.79%
MSCI-Pacific -16.35%
MSCI-Emg Mkt -19.31%
 
US Agg Bond -10.75%
US Corp Bond -14.21%
US Gov’t Bond -11.49%

Commodity Prices:

Gold 1,721
Silver 17.82
Oil (WTI) 88.90

Currencies:

Dollar / Euro 1.00
Dollar / Pound 1.16
Yen / Dollar 139.07
Canadian /Dollar 0.76
 

Macro Overview

A year after Covid-19 changed the course of travel, socialization, and financial markets, 2021 witnessed a much quicker rebound than had been anticipated. The equity market upswing caught many by surprise as it was not anticipated.

Inflation brought about by supply constraints and rising labor costs are expected to linger well into 2022, with little abatement as underlying inflationary pressures persist. Some economists are even expecting stagflation to become an issue in 2022 should economic growth stagger and inflationary pressures persist.

Labor shortages triggered by the pandemic continue into 2022, leading to wage inflation and difficulty for employers filling over 10 million open positions nationwide. Workers are quitting their jobs at record levels, transitioning to higher paying positions and new occupations.

Consensus is that the Federal Reserve is on course to start removing monetary stimulus from the economy and begin raising short term rates as soon as March, in order to curtail inflation. Fed governor Christopher Waller described current inflationary pressures as “alarmingly high”.

Global vaccinations and the end of lockdowns, in both developed and emerging countries, allowed the world economy to reignite and get back on track in 2021. However, the recent emergence of new coronavirus variants threaten to once again derail economic recovery efforts throughout the world.

Pandemic driven volatility due to uncertainty affected financial markets throughout 2021, distorting economic data and possibly misleading Federal Reserve members. Central banks from various countries worldwide have started to raise short term interest rates in their efforts to combat inflationary threats in both developed and emerging economies.

A resurgence in Covid-19 infections brought about by the omicron variant is expected to stifle market momentum as travel restrictions and restraints reemerge globally. Supply chain issues continue to hamper numerous industries in various countries.

U.S. Census Bureau data revealed that for the first time ever that immigrants surpassed the number of births for the past census year which ended in July 2021. Population growth was driven by 245,000 entrants into the country, versus only 148,000 births.

Sources: Federal Reserve, Census Bureau, CDC, Labor Dept., Treasury Dept.

 

Rates Start Their Steady Climb – Fixed Income Overview

Various fixed income analysts expect a reversal in downward trending rates as the Fed prepares to start raising short term rates as early as the first quarter of 2022.

The Fed is on track to shrink its balance sheet of mortgage and treasury bonds sooner rather than later. The expectation is that the Fed will continue reducing or selling off portions of its $8.76 trillion balance sheet over the next few months. Markets view this dynamic as a form of tightening monetary policy, signaling the deliberate attempt to stifle inflation by slowing economic expansion.

The 10 year treasury bond yield rose in the final trading days of 2021 to 1.52%, up from 0.93% at the end of 2020. Corporate bond yields also rose for the year, yet not as significant as U.S. government bond yields.

Source: U.S. Treasury

 

Equity Markets Surprised Many in 2021 – Global Equity Overview

All sectors of the S&P 500 Index posted gains in 2021, with the energy sector leading, following a dismal outcome in 2020. Real estate, technology and financial sectors were also leading sectors in 2021.

Domestic equity markets were resilient to the challenges brought about by the pandemic, fairing better than developed international and emerging equity markets in 2021. Massive fiscal and monetary stimulus aided U.S. based companies amid supply constraints and labor shortages.

U.S. companies continue to absorb higher production costs and pass them along to consumers in the form of higher prices while maintaining favorable profit margins. Companies able to maintain their margin should do well during this next year.

Sources: S&P, Bloomberg

 

IRS Introduces New Tax Brackets & Standard Deductions For 2022 – Tax Planning

Heading into the new year, the recent higher than expected inflation numbers will also be affecting tax rates for everyone. The IRS has adjusted 2022 tax brackets to reflect the most recent inflation data. Ironically, the adjustment for higher inflation will amount to lower tax rates for many taxpayers. For those earning more in 2022 than in 2021, the applicable tax bracket may actually be lower than the prior tax year because of the inflation adjustment. Standard deductions and estate tax exclusions have also risen for tax year 2022.

Sources: IRS, taxpolicycneter.org, taxfoundation.org

 

 

How Inflation Might Ease – Consumer Behavior

The pandemic pulled forward or accelerated an enormous amount of consumer spending that was pent up for months during lock downs and closures. As a result, demand for automobiles, homes, furniture, and appliances all skyrocketed, driving prices higher and evaporating inventories.

Much of the pulled forward demand is expected to ease especially among consumers and businesses that modified their business models in order to work from home. As the transition for millions begin to settle, additional transitions are expected to be more limited in their impact.

Elevated prices for essentials including food and gasoline will limit how much money consumers have for discretionary items such as movies, furniture, and automobiles. As discretionary income falls, so does consumer demand, alleviating inflationary pressures. Several economists are predicting a pullback in the inflation rate as consumers slow spending behaviors and overall demand eases.

The most recent inflation data revealed an annual inflation rate of 6.2% from October 2020 to October 2021, the steepest increase in 31 years. Economists and market analysts alike believe that inflation may be temporary for certain goods yet more lasting for others as consumers determine where to spend.

Sources: Bureau of Labor Statistics

 

Record Mortgage Issuance Expected To Continue…For Now – Housing Market Overview

A robust housing market led to a record number of mortgages issued in 2021, with over $4 trillion in mortgage loans issued as reported by the Mortgage Bankers Association. A rush to refinance and purchase may continue as rates start to rise in 2022.

Continued low interest rates, work at home transitions, and rising wages all contributed to an ongoing demand for homes nationwide. Rising rates over the past two months have slowed the pace of refinances, yet purchases continue to materialize.

For some homebuyers, rising home prices have put homeownership out of reach, even with low interest rates and higher wages. The Federal Reserve Bank of Atlanta found that mortgages have become less affordable relative to income the most since 2008. It revealed that Americans needed about 29% of their income to pay a mortgage payment on a median priced home in early 2021, rising to 33% in October 2021.

Sources: Mortgage Bankers Association, Federal Reserve Bank of Atlanta

 

Over $1 Trillion Paid Out In Social Security Benefits In 2021 – Retirement Planning

A U.S. Government report compiled and released by the Government Accountability Office (GAO) found that 48 percent of individuals 55 and older had no retirement savings whatsoever. Statistics like this are where the concept of Social Security originated from.

The establishment of Social Security occurred on August 14, 1935, when President Roosevelt signed the Social Security Act into law. Since then, Social Security has provided millions of Americans with benefit payments. Over the decades, Americans have become increasingly more dependent on Social Security payments; however, for some Americans it may not be enough to rely on Social Security alone.

As of November 2021, over 69.9 million Americans received Social Security benefit payments, with over 51 million age 65 or older. The Social Security Administration estimates that Americans received over $1 trillion in Social Security benefit payments in 2021. Total annual benefit payments have nearly tripled in the past 23 years, up from $361 billion in 1997. Unfortunately, Social Security is a major source of income for many of the elderly, where nine out of ten retirees 65 years of age and older receive benefit payments representing an average of 41% of their income.

In 1940, the life expectancy of a 65-year old was 14 years, today it’s about 20 years. By 2036 there will be almost twice as many older Americans eligible for benefits as today, from 41.9 million to 78.1 million. Even the current drop in life expectancy to 77 years of age is not estimated to affect current projections much.

Social Security costs exceeded its income in 2020 for the first time since 1982, forcing the program to dip into its trust fund, which is currently just under $3 trillion. Social Security is funded by two trust funds, one for retiree benefits and another for disability benefits. Disability applications have actually been declining since 2010, with a decreasing number of workers receiving disability benefits since 2014.

The latest annual report issued by the trustees of Social Security and Medicare revealed that by 2034, the program’s trust fund will be depleted. Depletion means that Social Security recipients will no longer be receiving full scheduled benefits. Recipients would receive about three-quarters of their scheduled benefits after 2034. Congress can eventually act to fortify the program’s finances, but it may be years before it actually takes effect.

Social Security’s largest costs are attributable to Medicare, which represents over 76% of Social Security benefits. The report also mentioned that Medicare’s hospital insurance fund would be depleted in 2026. The trustees noted that the aging population of the country has placed additional pressure on both the Social Security and Medicare programs. A decade ago, roughly 12% of Americans were age 65 or older, today 16% of Americans have already surpassed 65, the eligibility age for Medicare.

Sources: https://www.ssa.gov/oact/TR/2019/index.html