May 2022
Market Update

In April came a story about a rabid fox attacking a congressman and others near the Capitol.  Now comes a story of a belligerent turkey accosting pedestrians along the Anacostia Riverwalk Trail in Washington D.C. What do the animals know?

While I doubt they are up on their Wallstreet Journal reading, animal spirits have certainly been at play in the markets thus far this quarter, as the S&P suffered its worst April in 52 years, dropping almost 10% for the month.  A combination of factors has pushed consumer sentiment in the negative direction as earnings season showcased a number of misses, COVID lockdowns in China continue to plague the supply chain, the Russia-Ukraine conflict continues, and then the Federal Reserve has signaled a fairly “hawkish” (oh, the animal puns just continue, don’t they?) outlook for interest rates. 

Is it any wonder that the stock market did not respond well to this very difficult environment?

We said it would be a year of transition and we expect this type of volatility will be present throughout the year.  Just remember that while volatile markets feel uncomfortable, this is generally when we find our best opportunities as well.  Let’s take a look at the events of this year and see where opportunities could present themselves in due time.

Earnings.  Despite the challenging environment – and we are a little more than half-way through all of the companies who will report profits – it may surprise you to know that 80% of the companies have reported a positive earnings surprise!  Even Europe’s earnings season has been well received in spite of more severe obstacles than our economy, due to the Ukraine conflict.  By sector, energy and other commodities have been positive, while the tech sector has gotten a bit of a beating, with the NASDAQ down 22% YTD vs. the S&P at -14%.  Some technology names, darlings of the past few years, are down 30% or more, setting up some very attractive buying points … eventually.

Russia / Ukraine Conflict.  War is never the outcome a civilized world desires, let’s just start there.  Ukraine did not invite this conflict, but they will defend their right to self-governance and we support that right as a democratic nation.  The economics of this war have created escalating oil prices, as Russia has used oil as a weapon upon the countries supporting Ukraine, and we will surely see higher prices for a vast number of goods that have their source in Ukraine and Russia, particularly steel and grains.  On the flip side, the Russian invasion of Ukraine has awoken the slumbering governments who had grown somewhat complacent in their military readiness and this represents some large opportunities for manufacturers of weapons and munitions.  The reliance of Europe on Russia for oil and most especially natural gas, also has created a huge opportunity for US produced oil and liquified natural gas, although it will take time to ramp up to fulfill everyone’s needs – but it will happen and likely will continue to be a huge future source of revenue for US oil companies.

Zero-COVID policy in China.  Is this a valid policy any longer?  Not our decision to make, but we as a nation are bearing the brunt of the effort to eradicate COVID in China as Shanghai and Beijing are experiencing lockdown measures, which is leading to further supply chain issues.  As the second largest economy in the world, their internal growth rate impacts our markets as well and their “PMI” – Purchasing Managers Index – dropped to 46 in April.  Anything below 50 signals a contraction in their economy.  However, projections from the IHME (Institute for Health Metrics and Evaluation) estimates that infection rates in China are likely to decline dramatically by July of this year, which could mean a strong rebound for both economies going into the end of the year. 

Interest Rates.  The Federal Reserve has been the wind behind the economic recovery from the pandemic from the early days of the lock-down.  While the Federal Reserve has raised rates now only twice – once by .25% and just last week by another .5% - you will not have felt that affect in your money market rates just yet.  Mortgage rates, on the other hand, have rocketed up from their lows when the 30 year mortgage rate bottom at just under 3% to hitting 6% this week.  That will absolutely be felt in the hyper-hot housing market.  See our graphic of the month for details on how this may hit housing prices. CLICK HERE The Feds have indicated another two .5% rate increases at each of their next meetings.  Once we start to see inflation numbers cool, they can take their foot off that gas pedal and we should see calmer bond markets with higher and more reasonable yields than we have seen in years.  Patience, however, will be required.

In your portfolios here, we are back fully to cash on the bond (Total Return) portfolios.  In the stock portfolios, we started taking risk off and moving to cash in early April and have continued with a move to cash for all or some positions in several of the models.  When you have a month like April – it still won’t feel like it was enough.  We do encourage you to reach out to us if you are concerned as ultimately, you need to be able to sleep at night and we can discuss the implications to your personal financial plan.

A reminder that you will also see in a separate email from us this week – we will be conducting our quarterly Zoominar  “Transition 2022; In Process” - on Thursday, May 19th at noon AZ time (1 p.m. Utah).

If you have questions, please contact us.

FINANCIAL PLANNING
TAX PLANNING
401(K) ALLOCATION
GRAPHIC OF THE MONTH

To download the May 2022 Newsletter: CLICK HERE