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.
By: Robert Verdugo, CMFC®, APMA®, Financial Analyst
As the Federal Reserve (the Fed) is poised to start raising rates today, and with the S&P 500 (1) down over 10% off its highs, is it time to declare the bull market dead? History would say no – in fact, a resounding no. Jess Menton’s article in Bloomberg, titled “What Happens to Stocks When the Fed Hikes: A Historical Guide”, does a quick dive into the historical performance of the S&P 500 after the first initial rate hike by the Fed.(2)
The previous 8 rate hike cycles all ended with the S&P 500 higher 12 months later, 50% of those instances had the market up after just three months.
The article also highlights the different sectors and their relative performance after the rate hike begins:
It makes sense that the technology sector would be the leader out of the gate, considering it’s typically the sector getting battered prior to the actual rates increase.
While this does argue the case that the bull run may still be intact, could there be a stumbling block (or two) that could make this time different? Absolutely, and it could very well be the reason why you’re gritting your teeth at the pump. According to the article, recent oil price surges may create a problem for the Fed. In the past, oil shocks have “… preceded economic downturns in the mid-1970s, early 1980s and early 1990s. But other recessions, like after 9/11 in 2001 and the global financial crisis in 2008, weren’t directly caused by a sharp rise in crude prices.” A second large reason for more volatility will be midterm elections this year, as they traditionally cause a ruckus for the markets in the preceding months before the elections.
The market is said to be forward looking, and it requires a very accommodating Federal Reserve to signal its moves. While it’s never been a perfect marriage, the stock market does its best to price in future actions in the current market. Is that what is happening during this correction? Only to start its rise after the hikes begins? Nobody knows for certain. What one can safely assume, however, is that more volatility is in store in the near future. Let’s also hope for a less stressful times at the gas station too, that would be nice.
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.
November returns would have looked very different had the month ended at Thanksgiving, but the last three days turned global markets on a head.
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 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.