With ongoing pandemic challenges, rising inflation and interest rates, and international conflict, the markets have been off to a rough start in 2022, with declining equity prices and fixed income/bond markets. One of the worst things for securities markets – and investors’ peace of mind – is uncertainty. Here are a few insights into how we arrived at this state, what might happen next, and how you can manage your finances to address the uncertainty.
How we got here
In the spring of 2020 during the emergence of COVID-19, the Federal Reserve slashed interest rates to record lows to combat the economic decline. As our economy emerged from a widespread lockdown in 2021, the Federal Reserve made it clear they would start raising interest rates in 2022, although at the time it was not clear by how much or how fast this would happen.
Rising inflation added to the sense of uncertainty. Inflation was anticipated at the start of 2021 as a result of multiple rounds of stimulus checks sent to most Americans during the pandemic and the difficulty of restarting a global economy after nearly 10 months of widespread lockdown. At the start of 2021, the Federal Reserve said inflation would be “transitory,” meaning it would be temporary. However, that has not been the case. In the 12 months leading up to February 2022, inflation was 7.9% – the highest it’s been since January 1982. Keep in mind, in February of 2021, we were just emerging from lockdown. Therefore, inflation numbers for the 12-month periods ending in June, July, and August will provide a clearer picture if inflation is under control.
Russia’s war in Ukraine is an additional hindrance to the fight against inflation. Rising fuel costs and pending international conflict certainly adds more pressure to an already uncertain future. Please note that the references to the Russia-Ukraine conflict in this article are an economic analysis. Like all of you, I’m deeply saddened by the humanitarian crisis unfolding.
While all these events are concerning, there is also reason for optimism. In February, the U.S. economy added 678,000 jobs and unemployment fell to 3.8% – the lowest since the pandemic. If the U.S. economy can add jobs at a substantial pace, that should alleviate some of the supply chain concerns contributing to inflation.
Additionally, on March 16, the Federal Reserve announced a 0.25% increase with up to six additional increases scheduled for later this year, and potentially more raises in 2023. This signals the economy is growing, which is typically a good sign for the equity markets. I would be more concerned if the Federal Reserve stopped raising interest rates in 2022 because that could indicate they are concerned about declining economic growth.
The prices of fixed income securities will likely face pressure in the near term in a rising rate environment, but a rise in interest rates has been somewhat priced into the fixed income markets since they started to decline in August 2021. Keep in mind that fixed income securities continue to pay their scheduled income payments and prices will likely stabilize once the future of inflation comes into focus.
For the remainder of 2022, the key to the equity and fixed income markets will be inflation. If inflation gets down to a manageable 3% to 4%, I could see securities markets responding positively.
What you can do
As always, a good investment plan considers your personal financial needs like expenses, tolerance for risk and income needs. A strong long-term plan should always factor in periods of market and economic uncertainty. If you would like assistance putting together a long-term investment plan, please call our offices. We are always happy to help.
Jason Egge is a Financial Advisor with Securities America, Advisors, Inc. Securities offered through Securities America, Inc., member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Bankers Trust, BTC Financial Services, a division of Bankers Trust, and Securities America are separate companies. Securities America and its representatives do not provide tax advice; it is important to coordinate with your tax advisor regarding your specific situation.
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