Fortis Wealth Management

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May 2022
Market Update
(all values as of 04.29.2022)

Stock Indices:

Dow Jones 32,977
S&P 500 4,131
Nasdaq 12,334

Bond Sector Yields:

2 Yr Treasury 2.70%
10 Yr Treasury 2.89%
10 Yr Municipal 2.72%
High Yield 6.64%

YTD Market Returns:

Dow Jones -9.25%
S&P 500 -13.31%
Nasdaq -21.16%
MSCI-EAFE -12.94%
MSCI-Europe -13.65%
MSCI-Pacific -11.56%
MSCI-Emg Mkt -12.65%
 
US Agg Bond -9.50%
US Corp Bond -12.73%
US Gov’t Bond -10.03%

Commodity Prices:

Gold 1,897
Silver 22.75
Oil (WTI) 104.15

Currencies:

Dollar / Euro 1.05
Dollar / Pound 1.24
Yen / Dollar 130.36
Dollar / Canadian 0.77
 

Macro Overview

The most recent inflation data released revealed an 8.5% annual increase, lower than many analysts expected. A consensus is gradually forming among economists that inflation may be peaking; a prediction is that the Fed may ease its rapid rate rise trajectory should inflation actually decelerate.

The Russian invasion of Ukraine entered its third month with no sign of a compromise, accompanied by multitude of international sanctions that continue to expand and impose economic duress on the Russian economy. The situation, meanwhile, continues to exasperate global supply chain constraints.

An increase in COVID-19 cases across China is hampering manufacturing and distribution for various industries throughout the country, delaying the shipment of finished goods to the United States and other countries and amplifying supply side constraints.

The U.S. dollar rose nearly 7% year-over-year versus other major currencies, making imports less expensive for U.S. consumers and mitigating inflationary pressures. Meanwhile, the Russian invasion of Ukraine contributed to a devalued euro, creating inflationary pressures throughout Europe, which is a substantial importer of petroleum & natural gas.

Employment costs rose in the latest release from the Bureau of Labor Statistics, indicating an increase in expenses related to wages and benefits for both government and private sector jobs. Rising employment costs pose a challenge to companies as they either pass along higher costs to consumers or bear reduced profit margins. Rising employment costs contribute to broader inflationary pressures.

The IMF and the World Bank reduced global economic growth forecasts, due largely to geopolitical tensions arising from the Russian invasion, which continues to exacerbate global supply chain issues and foster inflation. European companies potentially face additional risk if demand from China and the U.S. falters due to an economic slowdown.

Russian energy companies are reluctant cut oil and gas sales to European countries because a loss of revenue would threaten the stability of the Russian energy industry and overall economy. Roughly 70% of Russian exports are energy products including natural gas and petroleum, while approximately 8% of U.S. exports are energy-related. The sharp decrease of Russian natural gas to various European countries would likely benefit U.S. energy companies, as U.S. shipments of LNG (Liquid Natural Gas) to Europe are estimated to increase over 60% in 2022 relative to 2021.

Analysts are expecting the housing market to cool off relatively soon, due to rising mortgage rates and slowing real wage growth. A potential concern is that, as housing slows, so might GDP, given that the housing industry represents roughly 20% of the nation’s economic growth.

Sources: EIA, Labor Dept., Federal Reserve, BLS, IMF, World Bank

 
wages grew at 5.7% while inflation rose at 7.5%

Equities Struggle with Inflation – Global Equity Overview

Major equity indices ended the first four months of the year in negative territory. The S&P 500 Index fell 13.3%, the Dow Jones Industrial Average lost 9.25%, and the Nasdaq was down over 21% for the first four months of the year. The best-performing sectors included defensive stocks such as energy, food, and utilities, which comprise companies providing essential products and services.

Companies are hesitant about passing higher costs along to consumers, concerned that customers may purchase from competitors instead. This dynamic leads to lower margins for companies, which affects earnings, the primary driver of stock prices.

A strong dollar is weighing on U.S. multinational firms, whose earnings are negatively impacted as their goods and services become more expensive internationally. (Sources: Fed, Bloomberg, Dow Jones, S&P, Nasdaq)

Rates Rise As The Fed Tightens – Fixed Income Update

Global bond yields rose in April, with both government and corporate bond yields rising across various international regions. Several analysts posit that the Fed may be raising rates too quickly in response to inflation data that may have caught the Fed off guard. Should economic growth start trending lower, the Federal Reserve is expected to potentially decrease its projected pace and amount of increases.

Yields across most bond maturities flattened out in April, a situation referred to as a flattening yield curve, indicating uncertainty in the direction of interest rates. Inflationary expectations have a meaningful impact on such predictions.

Some economists note that the Federal Reserve’s planned trajectory for increasing interest rates may be too aggressive and lead the country into a recession. Prior Fed rate hikes have historically been accomplished during periods of strong economic expansion, which is not currently the case. (Sources: Federal Reserve, Bloomberg)

Wage Increases Aren’t Keeping Up With Inflation – Labor Market Overview

The most recent wage data released by the Labor Department showed a 5.7% increase in wages for the past year, below the current rate of inflation. With inflation outpacing wage growth, workers are experiencing shrinking discretionary income. This diminishes the purchasing power of consumers, making it difficult to maintain spending habits. Many economists believe that the trend of wage increases may end soon, as companies may start to trim employee expenses and start reduce staff in the event of a recessionary environment.

The Department of Labor tracks wage growth versus inflation as average real hourly earnings, which subtracts inflation from gross wages. Although wages grew from January 2021 to January 2022, they didn’t keep up with the broadly rising costs of food items over the same period.

Sources: Department of Labor

 
the u.s. dollar has risen over 7% for the year

U.S. Economy Slowed Down In The First Quarter – Domestic Economy

Domestic economic growth, as measured by GDP, turned negative for the first time since the second quarter of 2020, when the pandemic was in full swing. Initial reports indicated that a drop in exports was to blame, but many economists believe that a general downward trend may have started to form.Economists outline a number of factors affecting growth in the U.S. economy, with no standalone reason for a possible slowdown. A pullback in economic expansion may come from the exhaustion of pandemic relief funds, rising interest rates, inflation, lower disposable income, and uncertainty regarding COVID-19 infections. (Source: Bureau of Labor Statistics, Bloomberg)

Strengthening U.S. Dollar May Help Curtail Inflation – Consumer Inflation Dynamics

The U.S. dollar has risen over 7% over the past year, driven by increasing interest rates and a flight to safety for international investors. A stronger dollar is a hindrance for certain U.S. companies that attribute a large portion of revenue to overseas sales. Should the dollar continue on its rising trend, analysts project that a number of U.S. companies will see decreased earnings. Foreign investors tend to flock to the U.S. dollar as rates increase, seeking higher returns on idle cash and relative safety from geopolitical turmoil.

The price of U.S. exports become more expensive worldwide when the dollar rises, posing a challenge for U.S. multinational companies. As the dollar increases in value versus other currencies, U.S. exported goods become less affordable in the international markets. Conversely, the strengthening dollar has made imported goods into the United States more affordable. (Sources: https://fred.stlouisfed.org/, Bloomberg, Commerce Department)

 

 
disposible annual income for the average household fell to $45,997

Disposable Income Drops For Consumers – Consumer Behavior

As inflationary pressures tend to affect the prices of essential goods more than the prices of non-essential goods, consumers are often left with minimal funds to make discretionary purchases.

The rapidly rising costs of gasoline, natural gas, and groceries have left many families with less disposable income. Discretionary products and services including movies, furniture, and clothes become less attainable with inflation. In addition to rising prices, consumers are faced with rising interest rates that elevate consumer loan rates for cars, credit cards, and mortgages.

Some economists anticipate a stagflationary environment, which combines high inflation and slow or negative economic growth. Such an environment can be damaging for both consumers and companies.

Disposable annual income for the average household fell to $45,997 in the first quarter of 2022, a $11,600 reduction from $57,597 for the same period last year. The dramatically higher average household incomes last year were attributable to massive pandemic relief funds, which have since been exhausted.

Sources: Bureau of Labor Statistics, Federal Reserve

Those 55 & Older Are Going Back To Work – Retirement Planning

Rising inflation, along with the cessation of pandemic relief funds, are prompting many aged 55 and older to return to work. Labor Department data shows that the participation rate for those above 55 years old rose over the past few months, with over 480,000 55-plus-year-olds returning to the labor force. A multitude of available jobs has also made it enticing for many to reenter the work force, with over 11 million open positions nationwide.

The return to work of those over age 55 may postpone retirement for many, who may have been planning on retiring permanently in the near future. The dramatic rise in stocks valuations and 401k plan values over the past two years positioned many for a possible earlier retirement. But with recent market valuations sliding, many may need to recalculate the prospect of imminent retirement.

Other factors encouraging a return to the workforce include school re-openings, remote and flexible work opportunities, and attractive wages.

Sources: Department of Labor