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Weekly Market Commentary March 28, 2022

3/28/2022

 
​The Markets
 
Be careful what you ask for, you just might get it.
 
In early March, almost two-thirds of Americans who participated in a Nationwide Retirement Institute survey said the Federal Reserve (Fed) should take more aggressive action on inflation. The next week, the Federal Open Market Committee (FOMC) did just that. It increased the target range for the Federal funds rate by a quarter point to 0.25 percent to 0.50 percent.
 
When rates rise, borrowing becomes more expensive. The change often reduces demand and pushes prices – and inflation – lower. Last week, the Fed rate hike began to affect consumers and investors in a variety of ways. We saw:

  • A sharp increase in Treasury rates. Last week, the 2-year UST rate rose from 1.97 percent to 2.30 percent. When bond rates rise, bond prices fall, and that can make bonds less attractive to investors. Ben Levisohn of Barron’s reported:  “With government bonds on pace for their worst year since 1949, investors are looking for other places to put their money – and they may have settled on stocks. In recent weeks, stock and bond prices have stopped moving in the same direction…”

  • Demand for home loans and refinancing drop. Last Friday, the rate on a 30-year fixed mortgage rose to 4.95 percent. That’s 1.64 percent higher than it was a year ago, reported Diana Olick of CNBC.  One consequence of higher rates is likely to be lower demand for homes. Last week, applications for mortgages were down 12 percent from the prior year, and the number of home refinancing applications dropped, too.

  • The cost of carrying credit card debt increases. Last week, the average credit card rate rose from 16.17 percent to 16.25 percent, according to Kelly Dilworth of CreditCards.com. That means carrying a balance is more costly – and that expense is likely to continue to increase every time the Fed raises rates.
 
Currently, the FOMC expects to raise the target rate range at each of its six meetings this year. If rates increase by a quarter point each time, rates could be significantly higher by the end of 2022, reported Evie Liu of Barron’s.
 
Last week, major U.S. stock indices gained, reported Ben Levisohn of Barron’s.

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Weekly Market Commentary March 21, 2022

3/28/2022

 
The Markets
 
Markets were reassured by the Federal Open Market Committee (FOMC)’s actions last week.
 
The FOMC met on March 16 and did exactly what most people expected them to do. They raised the federal funds target rate by a quarter point. Federal Reserve Chair Jerome Powell said the Fed expects to continue to raise rates and reduce its balance sheet during 2022 to lower inflation.
 
The bond market appeared to give the Fed a vote of confidence. The yield on the two-year UST, which is the maturity that’s most sensitive to expectations for future rate hikes, rose from 1.75 percent at the end of last week to 1.97 percent. The yield on the benchmark 10-year UST also increased, but not by as much.
 
Randall Forsyth of Barron’s reported, “…moves in the Treasury market add up to a marked flattening in the slope of the yield curve, a classic signal the market foresees a slowing of real growth along with an eventual diminution of inflation pressures.”
 
In an ideal circumstance, the Fed would engineer a “soft landing” by pushing demand for goods down just enough to quash inflation without causing the U.S. economy going into recession. However, the Putin effect is making the Fed’s job harder. Fed Chair Powell stated: 
 
“…the implications of Russia’s invasion of Ukraine for the U.S. economy are highly uncertain. In addition to the direct effects from higher global oil and commodity prices, the invasion and related events may restrain economic activity abroad and further disrupt supply chains, which would create spillovers to the U.S. economy through trade and other channels. The volatility in financial markets, particularly if sustained, could also act to tighten credit conditions and affect the real economy…We will need to be nimble in responding to incoming data and the evolving outlook.”
 
Improved clarity around monetary policy reassured investors last week. Major U.S. stock indices rallied with the Standard & Poor’s 500 Index gaining 6.2 percent, the Dow Jones Industrial Average rising 5.5 percent, and  the Nasdaq Composite up 8.2 percent, reported Ben Levisohn of Barron’s.

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Weekly Market Commentary March 14, 2022

3/14/2022

 
​The Markets
 
Investor optimism is quite low.
 
In just two weeks, the war in Ukraine has changed the status of 1.3 million people – approximately the number of people who live in Philadelphia or Phoenix – from citizen to refugee, reported Rachel Pannett and colleagues at The Washington Post.
 
Investors have been sharply focused on the shorter-term implications of the war, which include slower economic growth and rising inflation as commodity prices soar, supply chains falter and some goods become more scarce, reported Matt Peterson of Barron’s.
 
The Standard & Poor’s 500 Index and Dow Jones Industrial Average are both in correction territory, down roughly 10 percent from previous highs. The Nasdaq Composite is down 20 percent from its prior peak, putting it in bear market territory, reported Nicholas Jasinski of Barron’s.
 
“What we have seen so far is an indiscriminate sell-off, particularly of European equities but also globally…Extremely defensive sectors that were not affected by the crisis have been sold heavily,” commented a source cited by Francesca Friday and colleagues at Financial Times.
 
Last week, though, investors appeared to take a deep breath and begin to reassess.
 
Major indices in the United States and Europe fell early in the week before reversing course. By the end of the week, stock indices in London, Frankfort, Paris and Milan had regained lost ground. However, U.S. indices finished the week lower after inflation numbers for February were released and talks between Ukraine and Russia failed to produce results.
 
Inflation in the U.S. rose 0.5 percent in February, excluding energy and food. That was a slower increase than the U.S. saw in December or January. However, with food and energy, which have risen sharply due to the war, inflation was up 0.8 percent and that was higher than December and January numbers. Overall, excluding energy and food, consumer prices were up 6.4 percent over the last 12 months.
 
The Federal Reserve is expected to raise interest rates this week as it tightens monetary policy to lower inflation.
 
During the last two years, the world has experienced enormous change. The COVID-19 pandemic led to rapid growth of e-commerce, a new work order (emphasizing work-from-home), innovation in cell and gene therapies (vaccines), and a rethinking of global supply chains. Some of these changes created opportunities for investors. Now, the war in Europe is layering on a new set of changes that have implications for defense, cybersecurity, energy and, possibly, other sectors of the market.
 
It can be difficult to remember during periods of upheaval but change often is accompanied by opportunity.

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Weekly Market Commentary March 07, 2022

3/7/2022

 
​The Markets
 
The world is adapting to a changing reality.
 
As the war in Ukraine intensified last week, financial markets grappled with uncertainty.
 
“After watching financial markets gyrate from hour to hour as Russia attacked Ukraine, I was getting dizzy myself,” reported Jeff Sommer of The New York Times. “People in Ukraine were dying. The Russian president, Vladimir V. Putin, put his nuclear forces on alert, and Western sanctions were beginning to bite. One moment stocks were up, the next they were falling. Then they were up again.”
 
Sanctions have economists revising expectations for global growth and inflation, reported Randall Forsyth of Barron’s. The chief economist at a leading financial institution anticipates that rising commodity prices (oil, gas, grains and palladium) are likely to push inflation higher than it might have been otherwise in 2022, and slow global economic growth. The Russian economy is expected to sink deep into recession, contracting by 35 percent in the second quarter of 2022, reported Karin Strohecker of Reuters.
 
War in Europe wasn’t the only concern for investors last week, though.
 
China’s deflating property bubble also created uneasiness. The property sector accounts for about 25 percent of China’s economy. Since last July, when Beijing limited Chinese property developers’ access to credit, a dozen developers have defaulted on bonds, reported The Economist. A bond default occurs when the bond issuer fails to make an interest or principal payment.
 
“The implications go far beyond the offshore bond market. Construction has stalled in places. Some developers are now selling assets to patch up their cash flows. Many have stopped buying land, causing the value of parcels sold by local governments to crater by 72% in January year on year. Home prices are falling in many cities…”
 
In the United States, economic data confirmed the resilience of the American economy as it recovers from the pandemic. February’s employment report, which was released last Friday, showed jobs growth accelerated as the number of new COVID-19 cases slowed. Unemployment fell to 3.8 percent with 678,000 new jobs created. It was notable that about two-thirds of the jobs created were in service sectors (leisure and hospitality, retail, and professional and business services).
 
Major U.S. stock indices finished the week lower, reported Ben Levisohn of Barron’s. Bond yields bounced around a bit last week as investors tried to make sense of war, sanctions and pending Federal Reserve rate hikes. The Treasury yield curve ended the week flatter, reported Karen Brettell of Reuters.

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