Macro Overview / May 2022
The most recent inflation data released revealed an 8.5% annual increase, yet came in below what many analysts had expected. A consensus is forming, among economists and analysts, that inflation may be peaking. The hope is that the Fed may ease its rapid rate rise trajectory should inflation actually be slowing.
The Russian invasion of Ukraine has now entered its third month with no sign of a compromise, along with a list of international sanctions which continue to expand and impose economic duress on the Russian economy. The situation, meanwhile, continues to exasperate global supply chain constraints producing material and commodity shortages throughout various industries.
An increase in Covid cases throughout China is hampering manufacturing and distribution for various industries throughout the country delaying the shipment of finished goods to the United States as well as other countries, enhancing supply side constraints.
The U.S. dollar has risen nearly 7% for the year versus other major currencies, making imports less expensive for U.S consumers and helping to alleviate inflationary pressures. Meanwhile, the Russian invasion of Ukraine has devalued the euro creating inflationary pressures throughout Europe, which is a substantial importer of petroleum & natural gas.
Employment costs for companies rose in the latest release from the Bureau of Labor Statistics, showing an increase in expenses related to wages and benefits for both government and private sector jobs. Rising employment costs pose a challenge to companies as they either pass along higher costs to consumers or have their margins reduced. Rising employment costs contribute to broad inflationary pressures.
Global growth forecasts were reduced by the IMF and the World Bank, due to geopolitical tensions arising from the Russian invasion which continues to inflame supply-chain issues worldwide and foster inflation. European companies are at additional risks if demand from China and the U.S. falters due to an economic slowdown.
Russian energy companies are reluctant to cut further fuel sales to European countries because a loss of revenue would threaten the stability of the Russian energy industry. Roughly 70% of Russian exports are energy products such as natural gas and petroleum, while about 8% of U.S. exports are energy related. Russia’s reliance on energy exports is critical for the integrity of the country’s economy. The halt of Russian natural gas to various European countries is expected to benefit U.S. energy companies as U.S. shipments of LNG (Liquid Natural Gas) to Europe are estimated to increase over 60% in 2022 relative to 2021.
Numerous analysts are expecting the housing market to start cooling off relatively soon due to rising mortgage rates and slowing real wage growth. The concern is that as housing slows, so might GDP, as the housing industry represents roughly 20% of the nation’s economic growth.
Sources: EIA, Labor Dept., Federal Reserve, BLS, IMF, World Bank
Equities Struggle With Higher Costs - Global Equity Overview
Major equity indices ended the first four months of the year in negative territory. The S&P 500 Index fell 13.3%, the Dow Jones Industrial Average lost 9.25%, and the Nasdaq was down over 21% for the first four months of the year. The best performing sectors included defensive stocks such as energy, food, and utilities, which include companies providing essential products and services.
Numerous companies are becoming hesitant about passing higher costs along to consumers, concerned that customers might buy from competitors instead. This leads to lower margins for companies which eventually affects earnings, the primary driver of stock prices.
A strong dollar is weighing on U.S. multinational firms whose earnings are negatively impacted as their goods and services become more expensive internationally.
Sources: Fed, Bloomberg, Dow Jones, S&P, Nasdaq
Rates Rise As The Fed Tightens - Fixed Income Update
Global bond yields rose in April, with both government and corporate bond yields rising across various international regions. Numerous analysts believe that the Fed may be raising rates too fast in response to inflation data that may have caught the Fed off guard. Should economic growth start trending lower, the Fed is expected to possibly slow its rate and amount of increases.
Yields across most bond maturities flattened out in April, a dynamic known as a flattening yield curve, indicating uncertainty in the direction of interest rates. Some analysts attribute this to the extent of inflationary expectations and how long inflation may last.
Some analysts and economists believe that the Federal Reserve’s trajectory of raising interest rates may be too aggressive and lead the country into a recession. Prior Fed rate hikes have historically been accomplished during periods of strong economic expansion, which is not the case now.
Sources: Federal Reserve, Bloomberg
U.S. Economy Slowed Down In The First Quarter - Domestic Economy
Domestic economic growth, as measured by GDP, turned negative for the first time since the second quarter of 2020, when the pandemic was in full swing. Initial reports indicated that a drop in exports was to blame, but many economists believe that a downward trend may have begun to form.
Economists view a number of factors affecting growth in the U.S. economy, with no sole reason for any possible slowdown. Contributing to a pullback in expansion include exhaustion of pandemic relief funds, rising interest rates, inflation, lower disposable income, and uncertainty surrounding Covid infections.
Source: Bureau of Labor Statistics, Bloomberg
Wage Increases Can’t Keep Up With Inflation - Labor Market Overview
The most recent wage data released by the Labor Department showed a 5.7% increase in wages for the past year, yet still below current inflation annualizing 7.5%. With inflation outpacing wage growth, workers and consumers alike are experiencing shrinking discretionary income. Such dynamics reduce the purchasing power of consumers, making it difficult to maintain customary spending habits.
Some economists believe that wage increases may be ending soon as companies may start to trim employee expenses and even start reducing staff should a recessionary environment evolve.
The Department of Labor tracks wage growth versus inflation as average real hourly earnings, which subtracts inflation from gross wages. Even though wages grew at an annualized rate of 5.7% from January 2021 to January 2022, wages still didn't keep up with the rising costs of various food items over the same period.
Sources: Department of Labor
Strengthening U.S. Dollar May Help Curtail Inflation - Consumer Inflation Dynamics
The U.S. dollar has risen over 7% since the beginning of the year driven by increasing interest rates and a flight to safety for international investors.
A stronger dollar can also be a hindrance for certain U.S. companies that have a large portion of their sales overseas. Should the dollar continue on its rising trend, economists and analysts believe that the run up in the dollar will translate into lower earnings for a number of U.S. companies. Foreign investors tend to flock to the U.S. dollar as rates increase, seeking higher returns on idle cash, and during periods of geopolitical turmoil.
A challenge that emerges for U.S. multinationals when the dollar rises is that the price of U.S. exports become more expensive worldwide. As the dollar increases in value versus other currencies, U.S. exported goods become less affordable in the international markets. Conversely, the strengthening dollar has also made imported goods into the United States more affordable, which become less expensive for American consumers as the dollar rises.
Sources: https://fred.stlouisfed.org/, Bloomberg, Commerce Department
Those 55 & Older Are Going Back To Work - Retirement Planning
Rising inflation along with no new pandemic relief funds are prompting many aged 55 and older to return to work. Labor Department data shows that the participation rate for those above 55 years old has been rising over the past few months, with over 480,000 55 plus year olds returning to the labor force. Plenty of available jobs has also made it enticing for many to reenter the work force, with over 11 million open positions nationwide.
The return of 55 plus year olds to work may postpone retirement for many, who may have been planning on retiring sooner rather than later. The dramatic rise in stocks valuations and 401k plans over the past two years, positioned many for a possible earlier retirement. But with recent market valuations sliding, the prospect of retirement may be further out than desired.
Other factors encouraging a return to the workforce include vaccinations, school re-openings, more remote and flexible work opportunities, and attractive wages.
Sources: Department of Labor
**Market Returns: All data is indicative of total return which includes capital gain/loss and reinvested dividends for noted period. Index data sources; MSCI, DJ-UBSCI, WTI, IDC, S&P. The information provided is believed to be reliable, but its accuracy or completeness is not warranted. This material is not intended as an offer or solicitation for the purchase or sale of any stock, bond, mutual fund, or any other financial instrument. The views and strategies discussed herein may not be appropriate and/or suitable for all investors. This material is meant solely for informational purposes, and is not intended to suffice as any type of accounting, legal, tax, or estate planning advice. Any and all forecasts mentioned are for illustrative purposes only and should not be interpreted as investment recommendations.