Q1 2022 Update

Q1 2022 Update

Ehhh,  What’s up Doc?

Just two years ago, media had zero coverage of inflation as a topic of interest. Now, multiple stories appear every day about how inflation is affecting the global economy, consumers, and business.

In many ways, the economy is like a three-legged stool. For a strong economy we rely on strength in three sectors, consumer discretionary, financials and technology. Inflation is affecting all three of these sectors.

Consumer Price Inflation was reported last week at 8.5%1 with many forecasters expecting that it is the peak. Then the Producer Price Index reported inflation at 11.2%. Those higher prices that manufacturers are paying have not, yet,  been passed on to retail outlets. The CPI, even if it peaks at 8.5% isn’t going to ease quickly.

Whether at the gas station, grocery store or general shopping, higher prices have caught our attention. Household and business budgets are being reprioritized by reducing discretionary expenses which will eventually impact the economy.

Housing is a major cause of inflation2 as the country deals with a limited number of houses for sale and a growing demand due to Millennial household formation. Housing data is added to the CPI on a lag. Rising home sales will be adding to the inflation data well into next year even if sales begin to slow.

Except for Baby Boomers, most investors have never seen inflation at today’s levels. Even most Boomers weren’t big investors in the ’70s when inflation was even higher than today. Gasoline rationing and grocery shortages were not supposed to happen in America.

In 1979, Fed Chairman Paul Volker changed monetary policy3 and aggressively raised interest rates to 13%. Home mortgage rates rose to as much as 21%!  The economy responded to expensive money and prices began to fall. ​The rate hike was hard and much like giving a child cod liver oil.  It was unpleasant but “what the doctor ordered.”  Collective thinking by the public and all levels of government changed from this experience.

Forty years of declining interest rates4 benefited job creation, wages, purchasing power and the country’s standard of living.  The stock and bond markets began long-term appreciation trends. “Buy the dip” and “the market always goes up” became common beliefs.

Today’s Fed Chairman, Jerome Powell, has a task similar, but different, than the Fed confronted in the ‘70s.  In the post-Covid economy business conditions are much different than at the beginning of our technology explosion.

Raising rates aggressively could cause a recession5 boosting unemployment and aggravating existing shortages.  Higher interest rates would push 30-year mortgage rates above the current 5% slowing home sales. Lower home sales results in lower employment and broadly impacting related industries.

A broad base of stocks has been declining for several years6, but the falling prices have been masked by Wall Street propping up favored technology and growth stocks.  Now, with the Fed announcing higher interest rates those same favorite stocks that dominate major indexes are being repriced to lower levels.

For investors whose major experience in the markets has been post-2008, it is time to examine basic assumptions.  Interest rates are rising which means the safe haven of bond investing is gone7.

Bonds benefit from falling interest rates and lose value with rising rates. Bond values and interest rates are connected to each other as on a teeter-totter. The majority of investors have significant bond allocations as the primary means of protecting their portfolios. It is essential to reconsider this assumption. As of mid-April, Barclay’s Aggregate Bond Index (AGG) is negative 9.11% year-to-date. That isn’t the safety asset that investors expect.

Investor’s favorite FANG stocks (Facebook, Amazon, Apple, Netflix, and Google) are negative 18.66%. The NASDAQ is negative 14.63% while the S&P is negative 7.71% at this writing. This year is different than we are used to. It is changing and as the Federal Reserve attempts to conquer the inflation it created, more changes in the markets lie ahead.

Higher interest rates make rising dividends more valuable8 in the near term than investing in a company with an unproven product or concept. That includes many growth and technology firms.

Shortages have revived a focus in commodities9 which most portfolios have ignored for a few decades. New industry leadership will surface from recent knee-jerk volatility. We will adapt.

Questions? Call us. We are here for you!  301-294-7500

 

 

 

 

1 https://www.nytimes.com/live/2022/04/12/business/cpi-inflation-report

2 https://www.washingtonpost.com/business/2022/01/31/if-policymakers-are-serious-about-tackling-inflation-they-need-address-soaring-housing-costs/

3 https://www.thebalance.com/who-is-paul-volcker-3306157

4 https://www.ocregister.com/2021/10/19/40-years-of-falling-interest-rates-who-got-rich/

5 https://www.bankrate.com/banking/federal-reserve/will-the-fed-cause-a-recession/

6 https://www.cnbc.com/2022/02/16/stock-market-futures-open-to-close-news.html

7 https://am.jpmorgan.com/br/en/asset-management/adv/insights/ltcma/rethinking-safe-haven-assets/

8 https://www.investopedia.com/articles/investing/072115/do-interest-rate-changes-affect-dividend-payers.asp

9 https://www.bnnbloomberg.ca/commodities-soar-as-anxiety-over-supply-shortages-increases-1.1732299

SPECIAL EDITION MARKET UPDATE

SPECIAL EDITION MARKET UPDATE

Weekly Financial Market Commentary

April 12, 2022

Our Mission Is To Create And Preserve Client Wealth

Some Scary Grains of Truth

The Pain …

Perhaps we need to brace ourselves.

A slew of reputable sources are painting bleak pictures. Not just of the U.S. economy. But of the global economy. Pain peeks just over the horizon.

Bloomberg pulls no punches:

Global food prices are surging at the fastest pace ever as the war in Ukraine chokes crop supplies, piling more inflationary pain on consumers and worsening a global hunger crisis.[1]

In Ukraine, there’s the Black Sea Breadbasket Region. “Ukraine exports over 50 million metric tons of corn and wheat to the world, and Ukrainian farmers would normally be planting crops right now. With Putin’s invasion, that is unlikely to happen.”[2]

A photo in The Times of Israel shows what’s at stake.

“Farmers harvest with their combines in a wheat field near the village Tbilisskaya, Russia, July 21, 2021. (AP Photo/Vitaly Timkiv, File).”[3]

As Russian troops invaded Ukraine, breadbasket farmers were forced to neglect their bountiful fields; they had to fight or flee. The Ukrainian government announced that men 18 and older had to remain and take up arms. So farmers had to put get off their tractors and put down their scythes and sickles.

The war has thus upended “global trade flows and [has] fuel[ed] panic about shortages of key staples such as wheat and cooking oils. That’s sent food prices— which were already surging before the conflict started—to a record, with a United Nations’ index of world costs soaring another 13% last month.”[4]

And it’s not just food prices that are soaring. The inflation report of April 12 should put a pit in all our stomachs.

Inflation rose at the fastest pace in 40 years  in March as consumer prices jumped 8.5%

The consumer price index leaped 8.5% annually, the fastest pace since December 1981, the Labor Department said on Tuesday, likely cementing Federal Reserve plans for an unusually large half-point interest rate hike early next month. That increase is up from 7.9% in February and inflation now has notched new 40-year highs for five straight months.

Prices rose 1.2% from their February level, the sharpest monthly increase since September 2005. [5]

It goes without saying: The stock market does not like huge inflation numbers.

… Of No Gains

There’s pain ahead.

Russia has blockaded the Black Sea, so the strain on the global economy goes beyond food shortages.

Putin’s blockade in the Black Sea is an act of economic warfare against the world. Any shipping restrictions in the Black Sea will not only slow trade but will also make it more expensive. Countries in the Middle East and Africa rely on the Black Sea trade for critical supplies such as wheat. Even the U.S. relies on Black Sea trade to export more than $130 million of poultry products to Central Asia and other countries in the region.[6]

… Stays Mainly

Sunflowers also suffer. Who cares about sunflowers?

Sunflower oil is a key ingredient in all sorts of foods. Ukraine provides nearly half the world’s supply of sunflower oil. Russia’s invasion has set the sunflower oil industry in turmoil.

Thousands of items, also including ready meals and even wrapping paper, use sunflower oil. Prices are surging and the ingredient will only become more scarce from the summer as Ukrainian farmers may struggle to grow and export the crop. [7]

Companies like Martin’s Snacks that rely on sunflower oil will be particularly vulnerable. Ukraine is the largest exporter of sunflower oil in the world, responsible for up to 46% of sunflower-seed and safflower oil production, according to the Observatory of Economic Complexity. The second largest producer is Russia, which exports about 23% of the world’s supply.

Sunflower oil is now $1.28 per pound, versus the $0.60 it cost in September 2020. [8]

…In the Grain

But grain remains the key. Wheat and corn. The staples of the world.

According to Bloomberg;

Russia’s invasion has caused a humanitarian disaster in Ukraine and disrupted trade in foods across the world, sending wheat and corn prices to the highest in a decade. Ukraine is a key supplier of grains to countries in the Middle East. Meat prices are also under pressure as the cost of the feed used for cattle and pigs rises. 

The two countries are key players in certain major global industries, like computer chips, sunflower oil, grains, petroleum, and wood. Together, they account for more than a quarter of global wheat exports. Ukraine produces somewhere around 70-90% of the world’s neon gas, which is a vital component of the microchips used to manufacture smartphone and computer screens. Russia is responsible for 13% of the world’s crude petroleum exports, which means anything that requires transportation at any stage of production—almost everything—will be impacted. Penfield predicts inflation may hit 11% by the end of the year.9

The Pain of No Gains Stays Mainly in the Grain

Investors, brace yourselves. Don’t expect assets to show any gains in 2022. The real challenges lie not in seeking gains but in avoiding gargantuan losses. We can’t expect the disaster unfolding in Ukraine to cause just a blip in world stock markets. We might just see lots of red in charts with arrows pointing only in one direction: down.

Avoiding the Pain of Losses

Here at Research Financial Strategies we will turn all our analysis and energies toward preserving the capital of our clients.

The RFS strategy of concentrating in three themes in energy, oil and natural gas; commodities, food, groceries, wheat, corn, sunflower seeds, etc.; and metals and mining, aluminum, steel, copper, lithium, platinum, palladium, uranium, etc., have all paid off recently.

No gains certainly cause pain. But that’s nothing like the pain of losses.

As always, we encourage you to pass this email along to family and friends. We would welcome the opportunity to help them preserve their hard-earned assets.

How Are Your Investments Doing Lately?  Receive A Free, No-Obligation 2nd Opinion On Your Investment Portfolio >

Most Popular Financial Stories

Memorial Day

Friends,Memorial Day is a time for Americans to honor and remember those who lost their lives while serving in the armed forces. Veterans will think back on the...

read more
Signs on the Horizon

Signs on the Horizon

A Strange World All around us we see the same thing: weirdness. According to a client of mine, a McDonald’s on Interstate 81 posted a sign in the window:   Apply...

read more
Important Market Update

Important Market Update

Dear friends and clients,You’ve heard about it on the news, you’ve felt it at the grocery store and at the gas pump, you’re having to deal with it every day. It...

read more
Q1 2022 Update

Q1 2022 Update

Ehhh,  What's up Doc?Just two years ago, media had zero coverage of inflation as a topic of interest. Now, multiple stories appear every day about how inflation...

read more
SPECIAL EDITION MARKET UPDATE

SPECIAL EDITION MARKET UPDATE

April 12, 2022Our Mission Is To Create And Preserve Client Wealth Some Scary Grains of Truth The Pain … Perhaps we need to brace ourselves. A slew of reputable...

read more
Special Update

Special Update

All,You undoubtedly have heard reports that the world’s supply of wheat and corn are in jeopardy due to Ukraine and Russia both missing this season’s planting...

read more

 

Investment advice offered through Research Financial Strategies, a registered investment advisor.
* This newsletter and commentary expressed should not be construed as investment advice.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
* The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
* Asset allocation does not ensure a profit or protect against a loss.
* Consult your financial professional before making any investment decision.
* To unsubscribe from the Weekly Market Commentary please reply to this e-mail with “Unsubscribe” in the subject.

LinkedIn
LinkedIn
Share
RSS
6Lc_psgUAAAAAA9c7MediJBuq3wAxIyxDSt73c9j