April 28, 2022

The Federal Reserve’s Ice Bucket Challenge…

The Markets

Remember a few years ago when people raised money for charity by challenging others to pour buckets of icy water over their heads? Last week, the Federal Reserve poured a bucket of ice water over the United States stock market.

The Fed’s goal is to slow high inflation, which has been exacerbated by the war in Ukraine and China’s coronavirus lockdowns, without pushing the American economy into a recession. The question is whether the economy is strong enough to continue to grow as the Fed tightens monetary policy. Opinions about that are varied.

During the past several months our approach has been lessening tech and growth stocks until more clarity appears. Also, I have been capturing tax write-offs on our personal accounts to assist in lowering capital gain taxes when possible. I am also enclosing a chart that shows historical returns after a negative first quarter. It goes back as far as 1933 so please take a look at it and it shows that a first-quarter does not equate to a full year of return.

STOCK MARKETS AREN’T THE ONLY THING THAT’S BEEN VOLATILE. Consumer sentiment has been bouncing around, too. The preliminary results for the April University of Michigan Survey of Consumer Sentiment showed that sentiment jumped 10 percent from March to April, primarily because consumers are feeling more optimistic about the future.

•    More people are working. The unemployment rate was 3.6 percent in March, down from 6.0 percent in March of last year, according to the Bureau of Labor Statistics.

•    Fewer people are filing for unemployment. Last week, we learned the 4-week average of unemployment claims was 177,250, down from 610,000 in 2021, according to the Department of Labor.

•    The economy continues to grow. The Manufacturing PMI®, which measures growth in the manufacturing sector, was 57.1 percent in March, the 20th consecutive month of economic expansion. That’s a slower pace of growth than last year’s 64.7 percent. However, readings above 50 percent mean the economy is growing.

•    Wages are higher. Average hourly earnings have risen 5.6 percent over the last 12 months, according to the March unemployment report. While the increase has not outpaced inflation in all industries, it has in some. The year-over-year growth rate in hourly earnings was 6.5 percent for retail trades, 6.6 percent in professional and business services, 7.9 percent in transportation and warehousing, and 11.8 percent in leisure and hospitality.

•    Inflation is higher, too. As we’ve mentioned before, there are a lot of different ways to measure inflation. No matter which way you look at it, inflation is significantly higher than it was last year. The headline Consumer Price Index showed prices were up 8.5 percent in March, while core inflation (excluding food and energy prices) was 6.5 percent.

•    Company earnings are strong. Despite inflation and geopolitical turmoil, companies were profitable during the first quarter of 2022. With 20 percent of companies in the Standard & Poor’s 500 Index reporting on earnings so far, 79 percent have reported better-than-expected earnings.

It’s interesting to note that recent surveys have identified a disconnect between the strength of the economy and Americans’ beliefs about the economy. A February 2022 survey conducted by Navigator Research found that 35 percent of Americans thought the economy was experiencing greater job losses than usual.  A February 2022 Gallup Poll found that 42 percent of those surveyed thought the economy was performing poorly.

https://mcusercontent.com/ad6da41a2fdd93ce97806175e/files/08f4f2e1-d0df-8bba-5ca2-ac78786b2960/First_Quarter_Returns.pdf

Focus On The Positive
“What do you think about the revolt of nature against Man?

“I hope Man will not hesitate to shoot”.”

—C.K. Chesterton