Corinthian Wealth Management Market and Economic Perspective
Updated: Oct 6, 2022
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Back in January 2022, we spoke about economic challenges going into 2022 and that those challenges would most likely be temporary. The world seems to be shifting at a fundamental level. After decades of little European conflict, inflation, or shortages, the first quarter of this year is seeing all three. The economic challenges seem to be shifting again. Here are the concerns Corinthian Wealth Management sees continuing in 2022.
The big surprise for 2022 is that Russia invaded Ukraine. Earlier in 2021, Russia started to build troops along its border with Ukraine. Most of the world expected Russia to threaten an invasion but not invade. However, on February 24th, Russian President Vladimir Putin announced a "special military operation" that became a large-scale invasion of Ukraine. Putin has long expressed irredentist views, which means he wants to reunify parts of the former Russian Empire and the former Soviet Union into modern Russia. This is not Russia's first attempt to do so. In 1999, Russia invaded Chechnya, and in 2008 Russia had a military operation in the Republic of Georgia. 2014, Russia annexed Crimea, located in southern Ukraine on the Black Sea.
From an economic perspective, the war had the effect of increasing commodity prices. Most western aligned countries refused to purchase any crude oil and other minerals and commodities from Russia, which sent prices much higher. Russia is among the largest exporter of grains, natural gas, fertilizers, nickel, and aluminum. Most world consumers of these commodities will have to search elsewhere in the world to supply their needs. As for Ukraine, they provide much of the world with grains, neon, krypton, and xenon exports. The much-reduced supply of neon has negatively affected computer chip and laser manufacturers worldwide. Ukraine can no longer export these commodities while the conflict with Russia continues.
In 2021, U.S. consumers got a sharp surprise when inflation rose significantly for the first time since the early 1980s. That sharp surprise continues for 2022 when on March 10th, the U.S. Department of Labor released Consumer Price Index data as of February 2022. The report says February had a monthly increase of 0.8%, with the preceding 12 months having a rise of 7.9% before seasonal adjustment. Gasoline, fuel oil, natural gas, and used cars and trucks accounted for most of the inflation increase for the preceding 12 months.
The good news is that Americans are going back to work. On April 1st, the U.S. Department of Labor released employment data stating total nonfarm payroll employment rose by 431,000 in March, and the unemployment rate went down to 3.6 percent. The unemployment rate is almost down to pre COVID levels which were 3.5 percent in February 2020. More people are back at work, which will have a positive economic impact.
While more people are back at work and wages are gaining, they're growing slower than prices overall. As a result, inflation-adjusted earnings have dropped 2.6 percent compared to this time last year. The result is that the average worker now has less buying power than last year.
The good news about Covid is that infection, death, and positive test rates have come down a lot since the beginning of the year, per the California COVID website. California has relaxed most masking mandates except where required in mainly high-density areas such as public transit and airports. Businesses have adapted to COVID and started thriving again. There's a feeling that the worst is behind us, and life seems to be getting back to normal.
But COVID is something we continue to live with as a new variant is on the rise. First detected in mid-January, per the CDC website, omicron variant BA.2 accounts for at least 25% of new west coast cases as of 3/1/2022. Per the World Health Organization, variant BA.2 appears to be more inherently transmissible than BA.1. Still, that difference seems to be much smaller than, for example, the difference between BA.1 and the Delta variant. Scientists are conducting further research to determine if the symptoms are more severe than the original omicron variant. Hopefully, this new variant won't slow business down going into Spring.
Interest Rates are on the rise.
On March 16th, the Federal Reserve raised rates by .25%, the first-rate hike since December 2018. The increase will correspond with the prime rate on which most consumer loans and credit are based. As the financial markets hate uncertainties, the Fed also signaled rate hikes six more times this year. In a speech by Federal Reserve chair Jerome Powell on 3/21/2022, he reinforced that if the Fed Board of Governors agrees to raise interest rates by more than .25%, they will do so. Again, Powell is putting markets on notice to expect variable interest rate hikes so the market knows what to expect. By the end of this year, interest rates should be at 2% or more.
The Federal Reserve has key responsibilities of maximizing employment and keeping inflation under control, also known as the dual mandate. They're trying to reduce inflation, which we are all experiencing, without killing jobs. That's the reasoning behind signaling six more rate hikes throughout 2022. The U.S.job market is very strong right now. So gradual interest rate hikes throughout the year are designed to not sink the job market.
As mentioned in the previous article, interest rate hikes can positively affect savings account interest rates at banks and credit unions. As a result, savers will benefit from the rate hikes throughout the year. In addition, those that rollover CDs will experience increased rates once their current CDs mature and are to purchase new ones.
Where do we go from here?
We continue to monitor these high-profile themes in 2022. There has been a fundamental shift in the U.S. stock market from growth companies to value companies, and Corinthian has responded to this change. The difference between growth and value is based on analysis that attempts to determine the future activity of a stock. Growth stocks are considered by analysts to significantly outperform the broad U.S. stock market over a period of time. Analysts believe in this outperformance based on products produced that are expected to sell well, superior management, or some other advantage versus their competitors. An example of a growth stock is Tesla.
Value stocks are considered to be undervalued and trade at a discount to their price to earnings, book value, or cash flow ratios. These stocks are generally made up of more established companies and are trading for less than analysts think the price should be. The theory is they are unrecognized by market investors but eventually will be, and therefore the stock price will go up. Every style has its day, and after years of underperformance, value seems to favor it. An example of an undervalued company is Ford.
Inflation is now expected to stay with us for the unforeseeable future. This is because we are currently having exposure to the banking sector to take advantage of increasing interest rates. In addition, we are looking at other asset classes to take advantage of increasing rates and commodity prices due to the war in Ukraine. As always, our goal is to manage accounts prudently while taking advantage of changes in markets and what they have to offer. And we hope you learn about economics and financial markets along the way. Don't hesitate to contact us if you have any questions about what was discussed here or about any account we manage for you. Our goal is to serve you in a meaningful, thoughtful, and respectful way.
All of us at Corinthian Wealth Management hope you and your family continue to have a healthy and happy 2022.