Stocks rebounded in March even as the Russia/Ukraine conflict continued to escalate. The key message from the Federal Reserve is that it is focused on fighting inflation and is prepared to hike short-term interest rates steadily and reduce its balance sheet until it reaches its goals. Q1 earnings season will kick off the week of April 11th and although Wall Street analysts have recently scaled back their expectations for quarterly earnings, they’ve been raising their forecasts for the rest of the year, according to FactSet. Earnings typically are the key engine of equity returns over the long run.
Here are 3 things you need to know:
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Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.
By: Thomas Steffanci, PhD, Senior Portfolio Manager
The first link in the supply chain, the number of ships backed up in Los Angeles and Long Beach harbors, is in sharp decline as the accompanying chart from BCA shows.
The harder part is relieving the structural scarcity of trucks, drivers, and logistics (i.e., port workers, warehouse capacity) to decompress supply-side inflation. As this is a longer-term problem, even with a slowdown in aggregate demand in the quarters ahead, overall inflation (aside from base effects) is likely to be stuck in the 3-5% zone for some time.
To a large extent, Covid sterilized labor force participation rates, as the willingness and ability to work may have been secularly altered. With birth rates declining and older workers reluctant to return to the labor pool, long term inflation is unlikely to return to the sub-2% pre-pandemic levels. These factors among others will ultimately induce the Federal Reserve (the “Fed”) to alter their inflation target or else risk a policy-induced recession.
Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.
Fed predictions, Omicron, geopolitical tensions, oh my! This year’s stock market weakness culminated with some of the sharpest intraday swings since the start of the pandemic. However, the stock market is forward looking, and investors may have already priced in this information.
Here are 3 things you need to know:
Sources:
Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.
By: Thomas Steffanci, PhD, Senior Portfolio Manager
Is the real unemployment rate 2.3%? If you back out people who quit voluntarily to look for better paying jobs, the answer is yes. Quitters are still “employed”. They are in transition to other employment opportunities and should be considered as part of the labor force. If you adjust the current unemployment rate of 4.8% for the 2.5% “quit rate” (highest in 20 years) the “real” unemployment rate is 2.3%. This belies the Federal Reserve’s continuing easy monetary policy because of a weak labor market. If it is actually “tight” it adds to the case that inflation is likely to be more persistent and higher, prompting earlier increases in the Federal funds rate than the market now expects.
*Note – blog post corrected corrected 10/22/2021.
Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.
By: Steven L. Yamshon, Ph.D., Managing Principal
The Federal Reserve (the “Fed”) bank knows that there is too much liquidity in the system but has mixed feelings about reducing it. My sense is that the Fed will need to see that the following five factors are in place before they do anything:
All of the above factors have been accelerating, which leads me to believe that the Federal Reserve will start to first taper excess liquidity, and then begin to raise interest rates by the end of 2022.
If the Fed liftoff occurs as planned and unforeseen circumstances do not occur, we expect the 10-year Treasury bond to level off around 2% to 2.25%. To us, the message is clear, in an environment of rising interest rates, new buyers of bonds need to keep their duration shorter than benchmark duration. If the Federal Open Market Committee (“FOMC”) follows through with increases in interest rates, monetary policy will not become extremely tight until 2024. It is too soon to guess about the pace of tapering and the rise in interest rates, but the big move in financial markets will likely occur when interest rates rise above the equilibrium rate. We are not there yet.
If monetary policy will not be restrictive for approximately three years, we believe it is too premature to shift to a defensive position, especially if investors share our view that risk assets should perform well over the next 12-months.
Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.