April 2022
Market Update

After a historically calm 2021, volatility returned in the first quarter of 2022, as inflation surged to 40-year highs, the Federal Reserve promised to raise interest rates faster than previously thought, and Russia surprised the world with a full-scale military invasion of Ukraine, marking the first major military conflict in Europe in decades. Those factors fueled a rise in volatility and pushed stocks lower in the first three months of the year. While all market segments were negative for the start of this year, the closing weeks of the quarter saw a “relief rally” that brought some improvement in results.

As we start a new quarter, markets are facing the most uncertainty since the pandemic, as headwinds from inflation, less-accommodative monetary policy, and geopolitics remain in place.

Inflation still sits near a 40-year high as we start the second quarter and with major commodities such as oil, wheat, corn, and natural gas surging in response to the Russia-Ukraine war, it’s unlikely that key inflation indicators like the Consumer Price Index will meaningfully decline anytime soon. Until there is a definitive peak in inflation, the Federal Reserve is likely to continue to aggressively raise interest rates, and over time, higher rates will become a drag on economic growth.   Our graphic of the month gives us some insight into what consumers are likely to cut first when the belts get tightened:  CLICK HERE.

The Federal Reserve, meanwhile, has consistently warned markets that aggressive interest rate hikes are coming in the months ahead, and this quarter we expect the Fed will reveal its balance sheet reduction plan, which will detail how the Fed plans to unload the assets it acquired via the Quantitative Easing program over the past two years. If the details of this balance sheet reduction plan are more aggressive than markets expect, or the Fed commits to more rate hikes than are currently forecasted by markets, that could weigh on stocks and bonds alike.

Finally, the Russia-Ukraine war continues to rage on, and the geopolitical implications have spread beyond the battlefield, as relations between Russia and the West have hit multi-decade lows. Meanwhile, crippling economic sanctions against Russia remain in place, while commodity prices are still very elevated, and the longer those factors persist, the greater the chance we see a material slowdown in the global economy.   For a personal insight on how the world may have changed over the past few years, please link here to our Guest Commentary from our own Amy Diamond, who shares her observations on successive trips to Italy! CLICK HERE

But while clearly there are risks to portfolios as we start the new quarter, it’s also important to note that the U.S. economy is very strong and unemployment remains historically low, and that reality is helping support asset markets. Additionally, interest rates are rising but remain far below levels where most economists forecast that they will begin to slow the economy. Finally, consumer spending, which is one of the main engines of growth for the U.S. economy, is robust, and corporate and personal balance sheets are healthy. 

In sum, the outlook for markets and the economy is uncertain, and we should all expect continued volatility across asset classes in the short term. But core macroeconomic fundamentals remain very strong while U.S. corporations and the U.S. consumer are, broadly speaking, financially healthy. So, while risks remain, as they always do, there are also multiple positive factors supporting markets, and it is important to remember that a well-executed and diversified, long-term financial plan can overcome bouts of even intense volatility like we saw in the first quarter.   Patience, as we have counseled before, will be important this year.

In your portfolios here, we are fully invested on all stock portfolios, albeit with a shift toward more lower volatility parts of the market (think Target not Zoom).  Bonds have just re-entered a few positions after sitting in cash the past few months, but in acknowledgement of the challenge ahead from the Federal Reserve raising rates, we have re-entered floating rate bonds which generally withstand this environment better than most other types of fixed income.

Not surprisingly, our conversations with everyone over the past few months have been peppered with concerns about the Ukranian invasion, oil prices and inflation, and the “R” word has been bantered around as well (recession).  We invite you to join us for our updated outlook for 2022 on Thursday, May 19th at noon MST.  We will send out an email reminder to register for this online event at the end of this month. 

If you have questions, please contact us.

FINANCIAL PLANNING
401(K) ALLOCATION
GRAPHIC OF THE MONTH

To download the April 2022 Newsletter: CLICK HERE