This week has seen some extreme market movements that we haven’t seen since 2009, and the since the first of the year, the major market indices are all in negative territory.
As we mentioned in our investment committee meeting recap, we expected difficulties for this first quarter, just not perhaps at this level. So, we thought that reaching out to clients and detailing the pressures on the market, some that we previously discussed and some that developed since our last meeting, may be helpful for you to understand what’s causing these large swings.
Inflation seems to be at the forefront of many discussions, and we have seen an increase in consumer product pricing that we have not experienced in over 30 years. As we have gone from being a net exporter of oil to a net importer of oil in just under a year, we have seen gasoline prices go through the roof. A trip to the grocery store is far more expensive than it used to be. We see the cost of regular everyday items like milk, bread and meat rise precipitously and the shelves in grocery stores barely stocked with popular items that we always took for granted would be there. Supply chain issues are real and have truly affected everything from consumer staple goods to items required in manufacturing of automobiles, computers and even children’s toys. With no real solution being implemented or offered, cargo ships continue to queue up at our nation’s ports causing frustrations for the front end user all the way to the consumer. And it’s the simple economics of supply and demand; the fewer the goods available the higher the price. Higher prices are the definition of inflation.
One of the ways that the government can control inflation is to raise interest rates and there are signs that interest rate hikes are imminent. There has been much debate amongst economists to what level and with what frequency those rate changes will be. We anticipate the first rate hike to come in March and some feel that the effect of that has already been reflected in the market. The question will be is how will the Fed’s tightening trickle down to the demand for goods and will just a few rate adjustments be enough or will it require a protracted tightening. We believe there will be a minimum of 4 rate hikes up to maximum of 7 rate hikes. At a standard 0.25 increase, this could mean anywhere from a 1% to a 1.75% increase in rates in the no so distant future.
Another impact to the markets has been the Omicron variant of the Covid-19 virus. Although it has turned out to be more easily transmittable than the previous Covid Greek letter flavors of the day, it seems to be far less serious than we were initially led to believe. But as we have learned to never let a good crisis go to waste, we have seen mask mandates reintroduced, sporting events postponed, and an altogether hysteria briefly appear for no reason. The belief is that the big “O” will leave as quickly as it came and we will learn to live with this virus like we do with the flu or influenza.
A large influence on the markets this past week has been the ever-growing tensions between the Russian Federation and NATO regarding the border sovereignty of the Ukraine. There has been much political posturing over the movement of troops and military equipment by both parties. The potential consequences of an invasion of the Ukraine by Russia, not only economically but geo-politically would be massive and were reflected in an over 1000 point swing in the market on Monday. At this juncture, we see this as the number one concern for the markets going forward and could truly destabilize the global economy.
Advisory Services offered through MRA Advisory Group, a Registered Investment Adviser. This information was developed by Broadridge, an independent third party. It is general in nature, is not a complete statement of all information necessary for making an investment decision and is not a recommendation or a solicitation to buy or sell any security. Investments and strategies mentioned may not be suitable for all investors. Past performance is no guarantee of future results. Nothing herein, nor any attachment, shall be considered to constitute (i) an offer to sell, nor a solicitation of an offer to purchase, any security or (ii) tax or legal advice.