High levels of inflation, skyrocketing oil and gas prices and Russia’s invasion of Ukraine dominated headlines and sent markets into a tailspin in the first quarter. Will the second quarter be just as eventful?
MARKETS BATTLE SPRING HEADWINDS IN FIRST QUARTER
After mostly ignoring negative headlines in the second half of 2021, markets finally responded to ongoing economic challenges in the first quarter of 2022. Inflation rates, which began raging in mid-2021, continued their upwarch march in the first quarter and hit a 40-year high of 7.9% in February.1 High oil and gas prices also rocked markets; following Russia’s invasion of Ukraine, oil jumped to more than $120 per barrel.2 These challenges weighed heavily on markets, leaving returns on the major indexes in the negative by the end of the quarter.
|Equity Performance as of March 31, 2022|
|Equity Index||Q1||1 YR||3 YRS||5 YRS|
Source: Morningstar. “Index Performance: Return (%).” https://www.morningstar.com/markets?CustId&CLogin&CType&CName&_LPAGE=%2FFORBIDDEN%2FCONTENTARCHIVED.HTML&_BPA=N. Accessed April 1, 2022.
In an effort to curb inflation, the Federal Reserve finally ended its bond buying program and began removing unnecessary liquidity. The Fed also approved an interest rate hike of 25 basis points (.25%) in mid-March, the first increase in three years. The hike is expected to be the first of seven total hikes this year.3
Despite these challenges, the overall economy did not experience a slowdown in the first quarter. The unemployment rate dipped to 3.6% in March, while the total number of unemployed Americans dropped to 6.0 million as the latest COVID-19 surge waned.4 Companies are catching up to pent-up demand as the supply chain improves, and more people are getting out and about as mandates and restrictions are removed in all areas of the country.
WILL HEADWINDS ABATE IN THE NEXT FEW MONTHS?
Although the economy remained strong in the first three months of 2022, it feels fragile as we enter the second quarter. Consumers are showing signs of spending fatigue; the supply shortage led to higher prices on everything from electronics and clothing to food and gas. Many people have depleted their pandemic savings, and consumers may begin focusing more on purchasing basic needs than discretionary items.
Many investors are currently wondering if the Fed’s rate increases can tame inflation without running the U.S. into a recession. To us, the Fed has waited too long to take action; if they continue moving slowly, they may eventually be forced to raise rates faster and higher than they would like, potentially leading to a recession by the end of the year.
The other big questions: How long will the conflict between Russia and Ukraine go on — and how will it continue to impact U.S. and global markets? Many countries have expressed their displeasure in Russia’s actions by removing them from the pipeline for goods. While Russia is a well-known exporter of energy, they also produce metals used to manufacture chips used in everything from laptops and cellphones to automobiles.5 Removing Russia as a supplier only makes an already-snarled global supply chain worse.
Markets may also see increased volatility as we head toward the mid-term election in November. Pressure will likely mount to alter the administration’s current energy policy, especially if gas prices remain high. The current challenges could lead to a changing landscape in Washington, with the possibility that Republicans could win control of both houses of Congress. With the Build Back Better legislation mostly dead and congressional seats up for grabs, the likelihood of any large government spending packages emerging is low.
With these challenges in mind, where should investors look for potential growth over the next few months? Equities could struggle, squeezed by consumer spending fatigue and higher cost of goods for producers. Bonds may be a viable alternative to the stock market, particularly as rates rise.
The best thing investors can do right now: Make an appointment with your advisor and make sure your financial plan still works for you. Above all, stay focused on the long term in your investment outlook. Short-term events may lead to increased market volatility over the next few months. The best approach is to stick with your plan and not allow yourself to be distracted from your goals.
1 Olivia Rockeman. Bloomberg. March 10, 2022. “U.S. Inflation Hit Fresh 40-Year High of 7.9% Before Oil Spike.” https://www.bloomberg.com/news/articles/2022-03-10/u-s-inflation-hits-fresh-40-year-high-of-7-9-before-oil-spike. Accessed March 24, 2022.
2 Markets Insider. “Oil (WTI).” https://markets.businessinsider.com/commodities/oil-price?type=wti. Accessed March 24, 2022.
3 Jeff Cox. CNBC. March 16, 2022. “Federal Reserve approves first interest rate hike in more than three years, sees six more ahead.” https://www.cnbc.com/2022/03/16/federal-reserve-meeting.html. Accessed March 24, 2022.
4 Bureau of Labor Statistics. April 1, 2022. “The Employment Situation – February 2022.” https://www.bls.gov/news.release/pdf/empsit.pdf. Accessed April 6, 2022.
5 Emily Peck. Axios. March 14, 2022. “How the war in Ukraine hurts the U.S. economy.” https://www.axios.com/ukraine-russia-war-us-economy-pil-gas-wheat-9440a3c9-b0e5-4341-a39a-83c9cc12ff5f.html. Accessed March 24, 2022.
The opinions in the preceding commentary are for general information only and are not meant to be predictions or an offer of individual or personalized investment advice. They also are not intended as an offer or solicitation with respect to the purchase or sale of any security. This information and these opinions are subject to change without notice. Any type of investing involves risk, including the loss of principal, and there are no guarantees. AE Wealth Management, LLC does not assume liability for any loss which may result from the reliance by any person upon any such information or opinions.
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