04/12/2022
If you want a quick world market update, this is an interesting read!
There is a lot of change to choose from: Russia’s barbaric invasion of Ukraine surely tops the list, inflation, spiking oil prices, rising interest rates amid sanctions and chaos in certain commodity markets, most prominently the nickel market. There are still labor and supply chain issues as well. The Market has responded with characteristic volatility, frequently offering banner headline days throughout the first quarter of 2022.
All of that said, as we closed out the first quarter, the S&P 500 was down roughly 4.7% since the beginning of the year which was a significant improvement over the February low wherein the S&P briefly traded down 10%.
We don’t think this is over but we do think it is manageable. The ups and downs are likely to continue as the Federal Reserve and market participants navigate this transition away from unprecedented government stimulus and artificially low interest rates. (That was the major change we were referencing last quarter, not the geopolitical!)
Rates have moved higher – not only the 10 year Treasury, but also the 30 year mortgage rate which is over 4% for the first time since early 2019[1] and seemingly headed over 5%. Said another way: if you are considering a purchase that requires debt, please do call us or your mortgage contact to discuss. The path to higher rates is not linear but the train has left the station, as they say.
Taking all of the aforementioned into consideration – there is another side to the story. We still have supply chain issues and labor shortages as well as rising prices. While those all sound like things we would usually deem unpleasant, they have an upside for companies’ earnings which is where the rubber always meets the road for Markets. The legitimate cost increases associated with the supply chain and labor issues gives companies “pricing power”. As per Wall Street’s usual, many companies are turning a crisis into an opportunity by taking cover under the headlines as they raise prices more than enough to cover increased costs. This is often adding to their earnings. Time will tell how long this holds or if it’s enough but there, is a flip side to this story, as if often the case.
The Market has absorbed the current state of being in Europe but is subject to headline risk – anything perceived as a significant shift from our current status quo would likely generate a response.
Long story short of the “what does this mean for us” question: hang tight, stick to your plan. As one of our managers, Clark Capital, says – Be The Pilot. Don’t let the turbulence bother you. Pilots and crew are not upset by normal turbulence. They know it happens and will be just fine. The same is true of Markets. This is normal turbulence in response to rising interest rates. Call us (soon, please) if you are thinking of taking on debt or have been considering a major purchase. Please also let us know if you are going to need additional cash in the coming months.
An important note on Russia’s invasion of Ukraine: This has generated concerns about China potentially invading Taiwan. There are questions around whether sanctions are working or will work to say nothing of the humanitarian concerns. Russia and China have used the sanctions as an opportunity to call the Dollar’s Reserve Currency status into question. That said, it looks like Russia is about to default on significant amounts of debt but this is not unexpected. Russia accounts for 2% of global GDP and has a less than 3% weight in the primary Emerging Market index[2] (MSCI) but there is the potential for “spillover” – how this affects trading partners, borrowers and lenders, among others. This will be an ongoing source of headlines and interest.
We came across an article from USA Today that equates each US state’s Gross Domestic Product (GDP – the “size” of an economy in shorthand) with the comparable sovereign country[3]. This offers great perspective on where we continue to stand, as a country, in the scheme of things. (Hint: We still stand very tall!) Russia’s GDP, as of 2018 – the last round of available data – was roughly on par with the state of Texas!.
Sending up good thoughts and prayers for the people of Ukraine.
Alisa C. Sakowitz
Financial Advisor
Park Avenue Securities LLC., Pacific Advisors
20 Bicentennial Circle, Suite 100
Sacramento, CA 95826
P. 916.379.0200 Ext 7241 FAX 916.379.0800
Pacific Advisors, LLC. Park Avenue Securities, LLC.
Registered Representative & Financial Advisor of Park Avenue Securities, LLC (PAS) 333 N. Indian Hill Blvd., Claremont, CA 91711 ph: 909-399-1100 Securities products and advisory services offered through PAS, a member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. Pacific Advisors LLC is not an affiliate or subsidiary of PAS or Guardian. Insurance Products offered through One Pacific Financial & Insurance Solutions LLC, DBA of Pacific Advisors. Pacific Advisors, LLC is not registered in any state or with the U.S. Securities and Exchange Commission as a Registered Investment Advisor. CA Insurance License
S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large-cap segment of the U.S. equities market. Indices are unmanaged, and one cannot invest directly in an index. Past performance is not a guarantee of future results.
Opinions are those of the author and not necessarily those of Guardian or its subsidiaries.
2022-136419 Exp 04/24
[1] https://fred.stlouisfed.org/series/MORTGAGE30US
[2] iCM, “Russian Equity & Debt Exposure in iCM Strategies”, February 28th, 2022
[3] https://www.usatoday.com/story/money/2019/04/17/how-gdp-of-us-states-compares-to-countries-around-the-world/39295197/
Many U.S. states have a gross domestic product surpassing that of entire larger countries. For example, Texas, at $1.6 trillion, equals Russia.
