Tag: Market Viewpoints

Market Viewpoints – Summer 2024

Keith Bonjour, Portfolio Manager
Keith Bonjour, CFP® Vice President, Portfolio Manager

The US stock market continued its winning streak in the second quarter this year, after seeing about a 5% pullback at the start of the quarter. US stocks continue to perform very well and emerging market stocks saw a nice rebound during the second quarter after several years of underperformance. Bonds ended the quarter relatively flat, and the Barclays Aggregate Bond Index remains slightly negative in the first half of the year.


The most recent reports on inflation for June came in slightly better than expected which has helped to calm market nerves. Markets were beginning to become uneasy with the previous inflation reports running a little hotter than expected. The Federal Reserve appears to be on track to start cutting the Federal Funds Rate in September assuming inflation reports do not surprise to the upside. However, instead of the projected three interest rate cuts this year, it appears they will only cut once or twice depending on inflation data going forward.

 
Economic growth in the US continues to be positive, however it does appear to be slowing down after better-than-expected data over the last year. It is too early to cause concern, but we will be monitoring this data closely to determine if it is just an adjustment expected slow growth going forward or if it begins to slow more meaningfully.

 
International economies are improving their growth projections with Europe narrowly avoiding recessionary levels. Japan’s growth prospects continue to improve, and China has also seen increased growth in manufacturing and exports. China’s consumer spending is still weak with low consumer confidence and their property markets continue to be strained.


Unemployment has ticked up slightly but continues to remain at historically low levels. Labor markets appear to be cooling off. There are less available jobs open per worker which is showing a gradual easing to more normal employment conditions. This should continue to help wage growth slow going forward, in turn, helping to ease inflation.


As a reminder from our last article, markets have risen during election years 83% of the time going back to 1928, with positive returns in twenty out of the last twenty-four election years. During the four negative return years during an election year, economic growth and higher unemployment were the biggest culprits for negative market sentiment.The positive trend is holding up so far this year, but we do expect more volatility as elections near. This is normally short-term volatility with things getting back to more normal level after elections. We do not recommend making any investment decisions based on anticipated election outcomes.

 
We continue to be mindful of all the risks the market faces for the remainder of the year, from a Fed policy mistake, inflation remaining elevated, company earnings coming under pressure, and continued geopolitical risks. We recommend staying the course with your investment objectives with the understanding that markets go through cycles and both the stock and bond market show positive returns at higher percentage rates the longer the time-period measured.

 
Please communicate with us if any short-term cash needs arise so we can look for opportunities to be pro-active when raising cash for any necessary distributions, which helps to protect against possible short-term negative moves in the market. We appreciate the trust you have placed in us and will continue to make prudent investment decisions as we navigate the markets going forward.

Market Viewpoints – Spring 2024

Keith Bonjour, Portfolio Manager
Keith Bonjour, CFP® Vice President, Portfolio Manager

The US stock market continued its winning streak in the first quarter after finishing 2023 on a strong note. Large cap US stocks continue to outperform US small caps as well as International and Emerging Markets. However, most bond markets pulled back slightly in the first quarter after an extraordinarily strong finish in the final two months of year.

Markets are still grappling with inflation, which is proving to be stickier in certain areas than the Federal Reserve would like. Shelter costs, auto insurance, travel and leisure, and energy prices continue to be the more difficult areas of inflation to tame. Markets are pricing in the probability of the Federal Reserve cutting rates three times prior to year-end at a quarter percent each cut, however if the inflation reports come in stronger than expected, the market will need to adjust its expectations. This could lead to some consolidation in stock prices if the soft-landing scenario starts to look less likely.

The US economy is still on strong footing after GDP growth in 2023 was better than expected. GDP growth expectations have increased so far this year, driven primarily by a healthy US consumer, strong labor markets, and continued low unemployment. The increase in real wages for US consumers as inflation cooled, has helped US consumer spending remain more robust than anticipated over the last year. It will be important to monitor inflation’s progress for the remainder of the year to help determine how the Fed may proceed and when they may initiate the first rate cut.

Geopolitical issues continue to dominate headlines with Russia’s war against Ukraine dragging on with no end in sight. More recently, Iran’s attack on Israel has further increased tensions in the region as the market determines if this will lead to a larger conflict. Most geopolitical events have little effect on the market. Nonetheless, this situation bears watching for potential spillover effects on energy prices and global trade, which could add to an already uncertain inflationary environment. Markets have remained resilient when faced with a multitude of risks in the headlines. This means we may see some market consolidation as markets digest future geopolitical developments.

As we discussed in our last article, election years typically see increased volatility, at least in the first half of the year, and 2024 is unlikely to be an exception. Markets have risen during an election year 83% of the time, with positive returns in twenty out of the last twenty-four election years. During the four negative return years, economic growth and higher unemployment were the biggest culprits for negative market sentiment.

 We continue to be mindful of all the risks the market faces in 2024, including a Fed policy mistake, inflation remaining elevated, company earnings coming under pressure, and continued geopolitical risks. We recommend staying the course with your investment objectives with the understanding that markets go through cycles and both the stock and bond markets show positive returns at higher percentage rates the longer the time period measured. Please communicate with us if any short-term cash needs arise so we can look for opportunities to be proactive when raising cash for any necessary distributions, which helps to protect against possible short-term negative moves in the market. We appreciate the trust you have placed in us and will continue to make prudent investment decisions as we navigate markets in 2024.

Market Viewpoints – Winter 2024

Keith Bonjour, Portfolio Manager
Keith Bonjour, CFP® Vice President, Portfolio Manager

Both stock and bond markets closed in positive territory to end 2023 despite all the market worries throughout the year. Bonds staged a strong rally in both November and December, after turning negative earlier in the year, to break their two-year losing streak. Stocks also rallied in both November and December to finish the year on a high note after pulling back from August through October.

The Federal Reserve held rates steady at between 5.25%-5.50%, without adding an additional rate hike in the last quarter of 2023, which gave a boost to both the stock and bond markets. It seems likely the Fed will now hold interest rates steady for the first part of the year with rate cuts possible as early as March, but the likelihood is stronger they wait until at least May before starting a new rate cut cycle.

As the Fed held their own rates steady in the 4th quarter, we saw interest rates around the country decrease, spurring the bond market rally and increasing expectations that the Federal Reserve would begin its own rate cut cycle at some point in 2024. The bond market tends to increase, historically, prior to the Federal Reserve starting to reduce the Fed fund rate.

Estimates vary widely of when the Fed will choose to start cutting rates and by how much, but they are expected to cut rates several times this year. This should begin to take some pressure off markets as the Fed will be moving to a more accommodative posture assuming inflation continues to move in the right direction.

The economy proved to be much more resilient in 2023 than expected going into the year with consumer spending remaining strong, unemployment staying low, and both wage and price inflation cooling throughout the year. This led to better company earnings and strong economic growth which drove robust gains for the stock market last year. Markets are taking a more cautious approach as we move into the New Year. Election years typically see some increased volatility, at least in the first half of the year, and 2024 is unlikely to be an exception. However, chances have increased for the Federal Reserve to engineer a soft-landing of the economy without causing a recession. Recession odds are not zero, but they have come down from where they were at this time last year.

If the economy can avoid a recession this year, growth is still expected to slow meaningfully compared to last year. Lenders are becoming increasingly more cautious when underwriting new loans.

The unemployment rate remains low but has been increasing. New job openings continue to fall and are now well off from their peak. Also, revolving credit and delinquencies have been on the rise which shows that tighter Fed policy is having its intended effect to slow down the economy. The Fed now must prove that they can pivot at the right time to begin to ease financial conditions before the economy slows too much. As I mentioned previously, recession odds have been lowered but we are not out of the woods yet. There is a still a risk that consumers pull back more meaningfully this year, slowing growth and hurting company profits. There is also a risk that certain areas of inflation prove sticky and begin to move back upwards which would force the Fed to readjust their rate cut projections.

We continue to be mindful of all the risks the market faces in 2024, from a possible Fed policy mistake, inflation remaining elevated, company earnings coming under pressure, and continued geo- political risks. We recommend staying the course with your investment objectives with the understanding that markets go through cycles and both the stock and bond market show positive returns at higher percentage rates the longer the time-period measured.

Please communicate with us if any short-term cash needs arise so we can look for opportunities to be pro-active when raising cash for any necessary distributions, which helps to protect against possible short-term negative moves in the market. We appreciate the trust you have placed in us and will continue to make prudent investment decisions as we navigate markets in 2024.

Market Viewpoints – Fall 2023

Keith Bonjour, Portfolio Manager
Keith Bonjour, CFP® Vice President, Portfolio Manager

The list of things to cheer about for markets this year has been few compared to the large list of things that are worrying the markets.  Despite all the risks the market has been facing, stocks have continued to climb the proverbial “wall of worry” this year.  Technology stocks have been doing the heavy lifting with the strongest returns overall. However, stocks cooled off in August and September after their strong rally to begin the year.  The selloff was driven by many of the same technology stocks that had the largest returns to begin the year. 

Bonds had finally rallied to begin the year after two straight years of negative returns.  They gave up the majority of those returns over the last quarter though as yields continued to rise.  This is worrying markets that the Federal Reserve may hike rates one more time this year and keep rates higher for longer next year.  Both worries would weigh on economic growth and tighten financial conditions, along with increasing the risk of a recession.

The US economy has proved very resilient so far in 2023. GDP growth has consistently come in above expectations all year alleviating the market’s fears that a recession was knocking on the door.  It is yet to be seen if a recession will be able to be completely avoided with the Federal Reserve achieving a soft-landing, or if stronger GDP growth and consumer spending in 2023 just kicked the can down the road until 2024.  The higher the Fed raises rates, the more strain it can put on the economy since Fed rate hikes work with a considerable lag.  The Federal Reserve runs the risk of raising rates too high and holding them at elevated levels for too long, which eventually leads to overtightening resulting in a recession.

Federal Reserve policy will continue to be watched closely by markets, looking for signs of when the Fed will stop its rate hike cycle.  The Fed has said they will keep rates at a higher level until they are sure that inflation is on a path to reaching their 2% target. 

Recent inflation prints have been slightly higher than expected due to the increase in oil prices and shelter costs continuing to weigh heavily on inflation.  However, interest rates have also increased over that period which works to tighten the economy.  The Fed acknowledged that the recent increase in rates may be doing the work for them, and they are still undecided if they will hike again during their November or December meeting, saying they will be data dependent between now and then. 

On the bright side, shelter inflation costs should start to move down through next summer which should alleviate some inflation pressure since shelter costs have been a large driver of overall inflation.  We will continue to monitor the data to determine its impact on economic growth and inflation.

We continue to be mindful of the risks the market faces going forward from an aggressive Federal Reserve policy stance, including sticky areas of inflation remaining elevated, company earnings coming under pressure, and continued geo-political risks.  We recommend staying the course with your investment objectives with the understanding that markets go through cycles and both the stock and bond market will eventually find their footing. 

Please communicate with us if any short-term cash needs arise so we can look for opportunities to be proactive when raising cash for any necessary distributions, which helps to protect against possible short-term negative moves in the market.  We appreciate the trust you’ve placed in us and will continue to make prudent investment decisions as we navigate the choppy markets.

Market Viewpoints – Summer 2023

Keith Bonjour, Portfolio Manager
Keith Bonjour, CFP® Vice President, Portfolio Manager

Inflation has continued to slow over the last quarter with June’s CPI (Consumer Price Index) coming in lower than expected with CPI measuring 3% over the last year after hitting 9.1% a year ago. Core Inflation, which does not include food and energy, also slowed last month to an annualized rate of 4.8%. While the CPI inflation numbers are lower than we have seen since March of 2021, they are still not low enough for the Federal Reserve to declare victory over its battle with inflation. The Fed voted to pause rate hikes in June, but they are projected to resume another 0.25% rate hike at their next meeting towards the end of July. 

The Fed is intent on bringing inflation back down to the 2% level with an understanding that inflation has remained stubbornly high, especially in rent/housing costs and wage pressures. Average hourly earnings are still showing growth of 4.4% over the last year, which is too high for the Fed’s comfort. Producer Prices have begun to show some relief, which is good news for future inflation as the cost to produce goods goes down, so inflation should continue to moderate through the end of the year if this trend continues. Markets will continue to move based on inflation expectations and the Fed’s policy reaction to the data.

Both the stock and bond markets are showing positive returns this year with stocks rebounding strongly since their October 2022 lows. Employment, consumer spending, and company earnings have remained resilient allowing economic activity to prove stronger than expected. This has created a so-called “Goldilocks” scenario in the market where inflation is moving down, economic data remains positive, and the stock market is rebounding. This optimism is boosting the chances for a softer landing in the economy and reducing the chances of a recession. However, the market and economy are not out of the woods yet. Markets need inflation numbers to continue their downward trajectory along with wage pressures to ease and consumer spending to remain resilient. The higher the Fed raises rates, the more strain it can put on the economy and Fed rate hikes work with a lag. We will continue to monitor the data to determine its impact on economic growth and inflation.

Company earnings have remained resilient with most companies reporting above consensus to start the most recent quarter, as businesses continue to pass on the higher cost of goods and services to the consumer. Corporate profit margins remain strong after most likely peaking last year; however, profits are beginning to come down as demand slows and supply chains improve. This should prove to be a positive for inflation and wage pressures, but if consumers pull back meaningfully it could dent corporate earnings and have a negative effect on markets.

We continue to be mindful of the risks that the market faces going forward from an aggressive Federal Reserve policy stance, including sticky areas of inflation remaining elevated, company earnings coming under pressure, and continued geo-political risks. We recommend staying the course with your investment objectives with the understanding that markets go through cycles and both the stock and bond market will eventually find their footing. Please communicate with us if any short-term cash needs arise so we can look for opportunities to be proactive when raising cash for any necessary distributions, which helps to protect against possible short-term negative moves in the market.

Market Viewpoints – Spring 2023

Keith Bonjour, Portfolio Manager
Keith Bonjour, CFP® Vice President, Portfolio Manager

Inflation continues to be top of mind for 2023. It reached a cycle high of 9.1% in June last year and began to fall in the second half of the year to finish at 6.5%. It has continued to moderate this year with the Consumer Price Index (CPI) falling to 5% in March as the price of both utility costs and food at home slowed. While this is still far from the Fed’s 2% inflation mandate, inflation has continued to move in the right direction.

The Federal Reserve is hinting at one more quarter percent rate hike in May before a likely long Fed pause to allow prior rate hikes to work their way through the system. This would mean the Fed funds rate would peak at between 5.00 – 5.25% for this Fed hiking cycle. The question then becomes after pausing for some time, how quickly will the Fed start cutting the Fed Funds rate? The Fed is indicating rate cuts will not come until 2024, but the bond market is pricing in cuts before the end of this year. A lot will depend on the inflation and economic data as the year progresses.

The Fed remains challenged by wage pressures due to historically low unemployment, sticky inflation in food and housing, and strong consumer spending in the services sector. However, we are beginning to see signs of a slowdown in some parts of the economy such as manufacturing while the services sector, which includes travel and leisure, continues to be strong.

The Fed expects some of the housing inflation to begin to come down in the second half of the year since this data works with a lag.

Stock and bond markets have rebounded in 2023, however both remain volatile and continue to move based on new inflation data and Federal Reserve reports. The stock market is also beginning to have a sharper focus on company earnings reports to look for signs of a slowdown in quarterly earnings. Markets continue to remain skeptical of additional Fed rate hikes since the Fed has historically raised the Fed Funds rate until something breaks.

The recent example of this was the collapse of Silicon Valley Bank after the bank suffered a large run on deposits in less than 48 hours after indicating problems with their liquidity and securities portfolio. The rest of the banking industry seems to have stabilized after the initial panic, but it is still too early to say whether more issues will arise from the Fed’s aggressive policy actions.

US GDP growth is likely to slow meaningfully as the year progresses, and may turn negative as the Fed tightening continues to weigh on the economy. The higher they raise the Fed Funds Rate and the longer they maintain those high rates, the greater the probability that those actions slow US growth enough to cause the economy to fall into a recession. However, the Fed has reacted quickly during times of stress and could end up cutting rates faster than they are currently projecting should additional stress hit markets or the economy.

The Fed reacted aggressively each time the market tried to rally last year, so markets will be watching for the Fed to tilt to a more accommodative posture, which could take pressure off the market and lead to a sustainable rebound. We continue to be mindful of the risks that the market faces going forward from an aggressive Federal Reserve policy stance, sticky areas of inflation remaining elevated, company earnings coming under pressure, and continued geo-political risks.

We recommend staying the course with your investment objectives with the understanding that markets go through cycles and both the stock and bond market will eventually find their footing. Please communicate with us if any short-term cash needs arise so we can look for opportunities to be proactive when raising cash for any necessary distributions, which helps to protect against possible short-term negative moves in the market.

Market Viewpoints – Winter 2023

Keith Bonjour, Portfolio Manager
Keith Bonjour, CFP® Vice President, Portfolio Manager

Inflation continued to show some signs of moderating during the fourth quarter of 2022 with the headline CPI reading falling to 6.5% in December after hitting a high of 9.1% in June.  The Federal Reserve dramatically raised the Fed Funds Rate throughout the year from a starting range of 0%-0.25% all the way up to a range of 4.25%-4.50% to end the year.  Expectations are that the Fed will continue to hike rates a few more times in 2023, but the hikes will be less sizeable, in the range of 0.25% or 0.50% each.  

The consensus is showing a peak Fed Funds rate of between 5.00-5.25% this year, but that could change depending on how quickly inflation moves downward, or if there are signs that inflation starts to increase in certain parts of the economy.  Both stock and bond markets had rough years in 2022 with the S&P 500 falling over 18% and the US Aggregate Bond index falling over 13%, resulting in the bond market’s worst year on record.

The stock and bond markets have both started 2023 with nice rebounds, however we expect volatility to remain elevated throughout at least the first half of the year.  Markets continue to monitor Fed policy and inflation closely, looking for signs of when the Federal Reserve will pause their interest rate hiking cycle.  

The markets have been on edge worrying that the Federal Reserve will be too aggressive and cause a larger than expected slowdown which could lead to a recession. The Federal Reserve still has a chance at a soft-landing where they slow the economy enough to significantly 

bring down inflation, but not enough to cause a recession.  However, the Fed’s history during significant rate hike cycles has shown they are not good at threading the needle for a soft-landing, and historically the Fed tends to over-tighten causing a recession. 

Expectations are that if the U.S. economy does rollover into a recession by the end of 2023, that it would be mild since unemployment remains low and consumer spending has remained resilient even in the face of rising prices due to high inflation.  The inflation data will be important to monitor as the year progresses since this will have a huge impact on Fed policy going forward.  

The economy should continue to slow this year as Fed policy tightening works with a lag.  Both consumer spending and a low unemployment rate have helped the economy avoid a significant downturn so far, but it will become more difficult this year especially if the Fed decides to raise rates more than their current projections.  

Company earnings remained resilient in 2022, as businesses were able to pass on their higher costs to consumers, but could come under pressure in 2023 if consumers pull back on spending and the economy continues to slow.  It is important to remember the economy and stock market do not operate on the same schedules.  The stock market usually bottoms well before the economy so while economic conditions may continue to slow for the near future, we will look for clues that inflation has peaked and begins to subside indicating the Fed is winning the battle. The Fed continued its aggressive rhetoric each time the market tried to rally last year, so markets will be watching for the Fed to tilt to a more accommodative posture, which will take pressure off the market and could lead to a sustainable rebound.

 We continue to be mindful of the risks that the market faces going forward from a more aggressive Federal Reserve possibly overtightening, sticky areas of inflation remaining elevated, company earnings coming under pressure, and continued geo-political risks. 

We recommend staying the course with your investment objectives with the understanding that markets go through cycles and both the stock and bond markets will eventually find their footing. 

We recommend communicating with us if any short-term cash needs arise so we can look for opportunities to be proactive when raising cash for any necessary distributions, helping to protect against possible short-term negative moves in the market.

Market Viewpoints – Fall 2022

Keith Bonjour, Portfolio Manager
Keith Bonjour, CFP® Vice President, Portfolio Manager

All eyes remain on the Federal Reserve this year as the Fed’s fight with inflation continues to have a large effect on financial markets.  Global stock and bond markets continue to struggle this year as the Fed front-loaded rate hikes in an aggressive manner by increasing the Fed Funds rate by 0.75% in each of their last three meetings.  The Fed Funds rate is now between 3.00-3.25% with projections that they could increase to 4.50% or above by the end of the year.  The stock market has attempted to rally a few times in anticipation that the Fed may be getting closer to the end of their rate hike cycle.  However, the Federal Reserve has quickly come out with more aggressive policy rhetoric, which caused these rallies to reverse.

The Federal Reserve continues to highlight their desire for a more restrictive policy stance until they have seen a meaningful and sustainable reduction in inflation.  It seems as if the Fed is attempting to keep markets down until they feel they have inflation under control, for fear that a rebound in markets would increase consumer spending and go against their ability to reduce inflation.  The Fed does not have control over the supply side of the economy so in order to bring down inflation; they are trying to reduce demand by making borrowing more expensive and tightening financial conditions.  The Fed’s tools for fighting inflation have been described as blunt force instruments that cause many disruptions in markets.

                The cost of borrowing has increased dramatically this year with 30-year mortgage rates approaching 7% after starting the year slightly above 3%.  The same is true for business loans, auto loans, and credit card interest rates.  As the Fed increases the Fed Funds rate, these increases trickle through the lending system causing higher borrowing costs.  The Fed’s goal is to try to motivate businesses and consumers to reduce spending in order for demand to come down.  The Fed would also like to see less job openings and more job seekers in order to bring the labor market into balance.  The Fed does not want to see wage pressures continue to build since this also goes against their goal of reducing inflation back to more normal levels.  As wage pressures build, companies increase prices to offset these additional costs, which adds to inflation.

                The U.S. economy contracted in both the first and second quarter this year, and is projected to show only slightly positive gains for the remainder of the year.  So far, US company earnings have remained fairly strong as companies pass on higher costs to consumers.  The job market continues to remain hot and unemployment figures are low which is helping to keep the economy from tipping into a recession as consumer spending remains robust.  The Federal Reserve is in a difficult position as they try to slow the economy to reduce inflation, without tightening conditions too much to cause a recession.  The probability remains elevated for a potential recession by the end of 2024, however many deciding factors will be in play going forward. 

The stock market usually bottoms well before the economy so while economic conditions may continue to slow for the near future, we will look for clues that inflation has peaked and begins to subside indicating the Fed is winning its battle.  We are mindful of the risks that the market faces going forward from a more aggressive Federal Reserve, elevated inflation, continued supply chain issues, and ongoing geo-political risks.  We recommend staying the course with your investment objectives with the understanding that markets go through cycles and both the stock and bond market will eventually find their footing.  It is important to communicate with us if any short-term cash needs arise so we can look for opportunities to be proactive when raising cash for those distributions, helping to protect against possible short-term negative moves in the market.

Market Viewpoints – Summer 2022

Keith Bonjour, Portfolio Manager
Keith Bonjour, CFP® Vice President, Portfolio Manager
Both the stock and bond markets continued their struggles in the second quarter this year following a rough first quarter. The S&P 500 closed down 20.6% in the first half of the year with the worst start since 1970. The NASDAQ lost 29.5% for its worst start ever, and the bond market fell 10.35% for its worst start since 1980.

Inflation continues to dominate the list of market worries as the Federal Reserve takes steps to increase the Fed funds rate and tighten monetary conditions in order to try to keep inflation from becoming entrenched. Supply chain shortages and the Russian invasion of Ukraine continue to push up the cost of energy and goods, which is working against the Fed’s efforts to combat inflation.

With inflation remaining at elevated levels, the Fed has indicated that they intend to front-load their rate hikes, meaning there will be larger rate increases early on in the process. The Fed indicated early in the year that they would hike rates in a more slow and steady manner, but they have had to make adjustments based on how difficult the economic conditions have become to try to reduce inflation.

The Fed chose to raise the Fed funds rate by 0.75% in their June meeting and indicated they may hike between 0.50%-0.75% again in their July meeting. By front-loading their rate hikes, the Fed is aiming to restrict financial conditions faster in hopes of having a larger tightening effect on financial conditions to bring down inflation.
 
Faster rate hikes have also caused the stock and bond markets to react negatively due to the fear that a more aggressive Federal Reserve rate hike cycle has a higher probability of becoming overly restrictive causing an economic slowdown, which also increases the probability of a recession.

GDP growth turned negative in the first quarter of 2022, in large part due to an increase in imports and a decrease in exports, causing a record U.S. trade deficit, however many of the other GDP indicators remained strong. GDP growth has been trending lower in the second quarter of 2022 as well, indicating that the Fed rate hikes are beginning to have a slowing effect on GDP growth.

The Fed has a difficult job ahead in trying to slow consumer demand by tightening financial conditions enough to reduce inflation while trying not to tighten too much that demand contracts too far causing a recession.

The Fed stated that they remain committed to tackling inflation so it does not become entrenched. The second half of the year should provide a lot more clarity on Fed policy to see if front-loading rate hikes works to slow inflation without becoming overly restrictive to economic growth.

The stock market is looking for clues that inflation has peaked and will come down to less elevated levels before putting in a bottom. The stock market usually bottoms well before the economy, so while economic conditions may continue to slow for the remainder of the year, we will look for clues that inflation has peaked and begins to subside for the possibility of a turnaround in the stock market.
We continue to be mindful of the risks that the market faces this year from a more aggressive Federal Reserve, elevated inflation, continued supply chain issues, and continued geo-political risks. We recommend staying the course with your investment objectives with the understanding that markets go through cycles and both the stock and bond market will eventually find their footing.

It is important to focus on the longer-term goals and objectives with an understanding that severe pullbacks will come and go as part of a normal market investment cycle. We also recommend communicating with us if any short-term cash needs arise so we can look for opportunities to be proactive when raising cash for any necessary distributions, helping to protect against possible short-term negative moves in the market.

Market Viewpoints – Spring 2022

Keith Bonjour, Portfolio Manager
Keith Bonjour, CFP® Vice President, Portfolio Manager
Both stocks and bonds struggled in the first quarter this year due to a more aggressive Fed posture, inflation risks continuing to increase, and the Russian invasion of Ukraine.

The US stock market experienced its first correction in almost two years as the Fed has steadily been increasing their rate hike expectations and discussing reducing their balance sheet as the year has progressed to try to slow down inflation, while the geopolitical risks from the war in Ukraine have only added further upside inflation risks.

The stock market began to improve throughout March, but still finished the quarter in negative territory. The bond market struggled in the first quarter with rate hike expectations increasing in a meaningful way with the Fed’s dot plot showing the potential for nine rate hikes this year.

At the beginning of the year, only three Fed rate hikes were projected by the Fed. This more aggressive Fed posturing has the market on high alert for a possible Fed policy mistake in the future if they were to overtighten causing a considerable slowdown in the economy.

Inflation continues to be the largest risk to the economy this year with a large supply and demand imbalance in many areas of the economy. The supply chain began to improve slightly early in the year prior to the Russian invasion of Ukraine. However, commodity prices including oil, natural gas, wheat and other commodities have increased due to the impact on supplies produced from both Russia and Ukraine further adding to the supply chain imbalances and adding upside pressure to energy costs throughout the globe, especially in Europe due to their large reliance on Russian oil and natural gas.

The Fed has taken a more aggressive posture to raise interest rates faster and begin to reduce their balance sheet this year, in an effort to slow the economy and stop inflation from becoming entrenched. It is too early to tell if the Fed will be successful in the efforts to slow inflation without causing too much of a meaningful slowdown in the economy.

The US is more insulated than Europe in terms of energy production so the US economy should be less impacted by inflated oil and gas prices. US GDP is projected to remain above trend this year; however, expectations have come down somewhat from the beginning of the year as inflation pressures begin to weigh on earnings expectations and consumer spending.

US companies have continued to show resilience in being able to pass along their increased input costs on to the consumer so earnings have continued to remain strong.

We will continue to monitor consumer spending throughout the year to determine if price increases begin to have a meaningful impact, which in turn will weigh on company earnings, especially companies that operate in the consumer discretionary sector.
US consumers have continued to show resilience in spending behavior in the face of higher costs, however the more entrenched inflation becomes, the higher the probability that consumer behaviors will eventually shift to a more cautious approach. The Fed has a difficult job ahead to try to rein in inflation, but not overtighten economic conditions to cause the economy to slow down too much.

While many positives remain for the global economy with global economic growth and company earnings expected to continue to remain positive in 2022, we maintain our view to be mindful of the risks that the markets face this year from a more aggressive Federal Reserve, elevated inflation, continued supply chain issues, and many different geo-political risks.

We recommend staying the course with your investment objectives, and we continue to rebalance and take profits as we see opportunities to protect portfolio gains and keep our portfolios in line with their investment objectives.

We also recommend communicating with us if any short-term cash needs arise so we can look for opportunities to be proactive when raising cash for any necessary distributions helping to protect against possible short-term negative moves in the market.

We recommend maintaining a more long-term focus on investment goals and objectives with an understanding that short-term headline risks rarely have a long-term effect on markets.