Quarterly Market Update 3.31.2022
The U.S. stock market was down -5.33 in the first quarter of 2022. The U.S. bond market was down similarly -5.58 in the first quarter. The volatility that started in September last year continued through most of the first quarter of 2022. It appears however, the market is stabilizing and has improved producing positive returns the past six weeks. Most experts agree that we are through the worst of the volatility but also that the volatility is not over.
Rising inflation and yields continue to hurt bond funds. The fact interest rates are rising is good for bond investors. There was a time when a diversified bond portfolio earned 6% annually with negligible risk. Once interest rates stabilize bond prices will as well.
The culprit of the volatility in both stock and bond markets is inflation. More specifically how the Federal Reserve is going to combat inflation. The Fed has been providing stimulus for the economy in two ways: (1) keeping interest rates low making borrowing inexpensive; and (2) injecting cash into the system by buying bonds. The volatility comes from the fear the Fed will act too aggressively and cause the economy to go into recession.
Among the standard causes of inflation these current issues are having an impact: (1) Increase in the money supply. The Federal Reserve has printed trillions of dollars over the past two years to stimulate the economy during and following the Covid shut down. The negative impact is the additional money supply contributes to inflation. (2) supply chain disruptions caused by Covid have reduced supply driving prices up. (3) Government sponsored unemployment was done to help people get back on their feet following the Covid shutdown. The negative impact is that paying people to not to work created a shortage of workers driving wages up. (4) Government policies. Rising energy costs are a significant driver of inflation and are very damaging to everyone across the board, especially those on the lower end of the income spectrum. The path to green energy needs to be much less punishing economically.
The areas with the greatest Inflation: housing and energy costs. Inflation on other goods has leveled and even dropped in the last month.
A couple important notes – we have recently experienced recession. Remember the great recession? How did the stock market perform? Remember everyone questioning why the stock market performed well during a recession? Do not worry about a recession. We have experienced inflation in the past. It has been a long time, but we have experienced it. During past periods of inflation, the stock market performed well. Most companies can increase their prices to account for increased costs. Especially the increased cost of fuel. Most, if not all companies can easily pass on increased fuel costs. So, inflation does not reduce profits.
Aside from all the noise surrounding inflation and the Fed, the economy is doing well. Inflation is driving revenues up as businesses and consumers pay more for the same. Savings rates are still high for businesses and individuals. The employment situation is good.
Please let me know if you have any questions.