April 2022
Market Update

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After celebrating a highly profitable 2021, capital markets are off to a rough start in the new year. Dramatic price increases rolling through our economy have caught the attention of the Federal Reserve. The recent quarter-point hike in interest rates is now expected to be the first of many. Inflationary concerns are further complicated by Russia’s invasion of Ukraine, which has important consequences for the energy markets. These two topics will take some time to sort out, and we anticipate volatility in the markets may continue in the coming months. The economy is in a relatively strong position to ride out this rough patch, with unemployment at exceptionally low levels and forecasts of above-average rates of GDP growth still anticipated for the year.

The Federal Open Market Committee (FOMC) raised rates a quarter-point at their March 16 meeting. Their commentary indicated we should expect several more rate hikes, and some of those could be larger than this first one. Analysts now expect the Fed to raise rates by roughly two full percentage points over the coming year in an effort to combat persistently high levels of inflation. In addition to the rate hikes, the Fed lowered estimates for economic growth to 2.8 percent, down from their previous estimate of four percent, and they anticipate inflation will continue to run at above-target levels for the remainder of 2022. The bond market reacted by lifting the yield on 10-year Treasury securities to around 2.4 percent, up from roughly 1.5 percent at the beginning of the year. As the Fed follows through on their plans, we will probably see those yields rise further.

Housing has been an especially hot sector, with average home prices rising by 15 percent in the past year. Historically low mortgage rates and a scarcity of homes on the market have contributed to that surge in prices. Banks are already looking to where the Fed appears to be headed with tighter monetary policy, prompting them to raise the rate on traditional 30-year mortgages to an average of 4.67 percent, up from last year’s record low rates around three percent. Even with wages on an upswing, that bump in mortgage rates will affect affordability and may soften the trajectory of home values.

Capital markets were already wrestling with inflation concerns and rising oil prices when Russia invaded Ukraine on February 24. Ukraine is a big spin-off from the former Soviet Union, with a population and geography larger than the state of California. It is strategically positioned between Russia and nations that are part of NATO. Since Ukraine declared its independence in 1991, Russia has persistently sought reunification, an aim they appear willing to pursue by diplomacy or force. The war is a humanitarian disaster, with thousands of people killed or wounded and over four million Ukranian citizens now seeking sanctuary in neighboring countries. Western nations are arguing for a boycott of Russian energy, which would punish Russia’s economy. However, that is not a practical option for Europe, which imports roughly a third of its energy resources from Russia. There are 27 nations that represent the European Union, with a combined population of around 450 million people. If the U.S. forces the EU to sanction Russian oil, it would likely be viewed as an escalation of the conflict. OPEC nations have declined to increase their oil production, and oil prices are reacting to the potential for shortages. Other industries could be affected, as well. The agriculture sector relies on Ukraine and Russia for materials to make fertilizers, and Ukraine supplies roughly 12 percent of the world’s wheat. Ukraine is rich in mineral deposits, and they are a dominant source of neon gas and krypton, both of which are essential to the semiconductor industry.  

While attention is focused on inflation, the Fed and the war in Ukraine, the U.S. economy is currently in good shape to ride out this period of uncertainty. Our economy has emerged from the pandemic-related shutdown and regained most of the jobs that were lost or furloughed. With unemployment at 3.8 percent, companies are competing for new workers and raising wages for existing employees. The “great resignation” is happening because people who want better jobs are able to find them right now. It has been an extraordinary couple of years. The pandemic changed the way people work and live, and reopening the economy brought a dramatic surge in consumer spending. Inflation will subside as conditions stabilize, but an inflationary environment presents challenges for investors. Corporate profits are squeezed by rising costs of labor and materials, and tighter monetary policy can prove treacherous for bonds. Geopolitical risks are always a potential concern, as our economy shares critical connections to events happening around the globe. We believe it is important for the U.S. to remain strong in order to help promote peace and stability here and abroad.

We welcome your call if you have any questions or topics you would like to discuss. 




Market Update April 2022
Past performance is not indicative of future results. The information contained in this report is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the items mentioned. The information, while not guaranteed as accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.