AS OF LATE
If we simply look at the data, we see that the first quarter not only was a had loses in terms of the total return for the last 90 days, but was also the worst quarter out of the last eight. That previously poor quarter in 2020 was triggered by the announcement of COVID. Be that as it may, there is really a lot more behind the first losing quarter out of the last eight.
What all is behind the losing quarter? A lot. The Federal Reserve and its posture. The Federal Reserve and future posture. Inflation. Rising interest rates. Supply chain issues. Rising wages issues. Worker shortage issues. China and it’s shipping issues. China and Taiwan. Growth expectations for stocks. Growth expectations for US corporate earnings. Other geopolitical issues. This crazy thing called COVID.
Realize ALL of these were in place before 2022 even arrived. Also, recall that the U.S. stock market fell a great deal more in the first six weeks of 2022 than in the second six weeks of 2022.
As we look over this graph below of the first 90 days of 2022, while certainly the first quarter was negative from the very first day, it seems understanding some of the things which impacted the negative performance of the first quarter is helpful. The items which could continue to confront the market in negative ways, I believe is truly important.
This is the 1st Quarter 2022 showing the SP500 index and the NASDAQ Index. Though both are negative in the 1Q, they did rally the last 2 weeks of the first 90 days.
If you will notice, there is one distinct thing which was not mentioned in our list of problems we perceive as facing the market(s).............. the war in Ukraine. It has been exactly five weeks (as of the end of March) since the war began. Though we hate what is happening in the Ukraine, the stock market side of investing in the U.S. has actually risen during those last 5 weeks. Crazy, but it is true. (Note chart above).
It appears that the war has had nothing to do with the downturn in the market and nothing to do with the short term rise in the market since the war began. It is purely coincidental timing. Should Russia move and actively start using chemical weapons (as opposed to creating chemical issues through what they bomb and destroy) or start to use nuclear weapons, then it is the view here that those actions would become impactors upon the markets, globally and U.S. both.
INTEREST RATES
One thing which does seem to be quickly impacting markets is the rise in interest rates which has directly impacted the number of mortgages people are obtaining. The biggest impact in the mortgage finance industry has actually been on the refinance side of things. Refinances have dropped like a rock off a cliff. Capital Research has talked for a long time and in our right hand side panel of each newsletter in the upper corner. We have noted repeatedly, about interest rates and if you need to refinance. We were encouraging readers more than a year ago to please get the refinancing done. If you haven't refinanced yet, a big estimate on our part would be, do not be dismayed. The rates have definitely jumped as of late, and in some cases actually doubled from about a year ago, but we also think they're going to have to come back down in a big way to help keep the economy moving forward. They will not come down today or tomorrow, but they will after a time to get the economy going again. They may not get down all the way to as low as they were, but they will begin to drift south not too far into the future.
Remember, in the graph below, the price of a bond and the interest rate move in OPPOSITE directions, just like a seesaw on a playground. If interest rates go up, the value of the bond goes down. Below we are showing the strong deterioration in bond prices since January 1 as interest rates have gone up. Capital Research, for the most part, moved to ultra-short term bonds in January to not have to suffer price deteriorations which have continued into February and March as you can see below. A 5.5%-8.5% drop in bonds within 90 days is certainly a large drop for buy and hold bond investors.
This shows the value/price (drop) of 20 year U.S. Government Bonds and Tax Free bonds during the first 90 days of 2022.
IS THE MARKET GOING INTO LABOR?
(It is not but the labor market is delivering a lot of pain to the economy)
In business, the most common theme in terms of the cost of any product or service has always been and likely always will be, labor. It simply is the biggest slice of the pie in terms of what it is going to cost to produce goods and services.
One of the constants which has been going on for about 20 months has been the labor issue. We all know, due to covid, multiple of millions of people were sent home and were out of work. Then as the workforce began to return slowly to their respective industries even though many employees did not return, this created a worker shortage.
Now to try to compensate for that worker shortage and to get them to return, some employers began to raise wages to attract people to come back to work for them. In some cases successfully, in other cases not so much. What we see happening now is shown in the graphs below.
Now we have the domino effect occurring. Workers are now receiving more money on an hourly basis than they were before (a year or more ago) and that is potentially beneficial to the economy. More money per hour might domino and mean more money to spend, at least in the near term. But that also will begin to domino and have a chilling effect for employers. If they are paying people more money and therefore making the cost of producing their goods and services rise, that makes them domino into them having to raise the costs of their products to the consumer. This pushes inflation higher, which none of us are really excited about. As people begin to spend the extra money they are making, with prices rising due to inflation, the domino falls again and that person actually cannot buy more than before since the price went up. The list of what they can buy starts to domino down and drop at some point due to inflation that is rising. Now employers, who are paying their employees more money per hour but have fewer goods and services purchased, begin to domino down and they cut those hours back and that means a reduction in total pay going into the pockets of employees and into the front door at home.
As was mentioned in the outset of this newsletter, many issues are confronting markets right now and the labor issue is just one - but a very large issue and it is not one to be able to be managed away quickly. Some of the others could rise or fall in terms of their importance on markets in possibly shorter time frames but the labor issues will likely linger for a long time.
We remain watchful!
Ken Graves, Chief Investment Officer
Capital Research Advisors, LLC
CaptialResearchAdvisors.com
Capital Research Advisors, LLC,
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