Broker Check

Quarterly Client Report Commentary

Re: 1Q 2022 – Interest Rates, Employment, Russia/Ukraine, and COVID.. never a dull moment

Dear Client:

Each quarter, after participating in a series of private calls and zoom conferences with trusted analysts, we formulate our view and strategy for the markets going forward. There are plenty of interesting issues facing us in 2022 and we have chosen a few to share with you in this commentary. If there are other issues you would like to discuss, please give us a call.

2022 Year to Date – Global Asset Class Returns
The 2022-year to date asset class returns reflect the market impact of rising inflation and anticipated Fed policy. The leading, and only positive, Asset Class year-to-date was Commodities (Bloomberg Commodity Index, 30% energy) + 25.5%. All remaining Asset Categories were negative year-to-date, Large Cap US stocks (S&P 500) were -4.6%, Real Estate Investment Trusts (NAREIT) were -4.6%, Developed Markets Non-US Equity (EAFE) were -5.8%, Emerging Markets Non-US Equity were -6.9%, and Small Cap US stocks (Russell 2000 index) were -7.5%. The Bond market was also negative led by, High Yield Bonds were -5.7%, and Core bonds (Bloomberg Barclays Aggregate Bond index) were -5.9%. The diversified Asset Allocation portfolio was -3.9%

Global Asset Allocation - The Russia-Ukraine Crisis: What Does It Mean For Markets?
Prior to the Ukraine War, Global growth was expected to accelerate to well above trend as we reopen from the Omicron wave and see an unleashing of pent-up consumer and corporate demand. Although growth prospects have been downgraded over the past month, much of this impulse remains and we still see supports from strong labor markets, light investor positioning, healthy consumer and corporate balance sheets, easing policy in China, and fiscal supports in several countries offset part of the drag from high energy prices. Markets have recovered a majority of their early-March sell-off and thus no longer look oversold, while risks remain elevated around geopolitics, policy tightening and growth. While the US appears to be on an aggressive tightening path, China is expected to ease as soon as this month. As such, we are optimistic about stocks including Non-US Emerging and Developed Markets. We are also optimistic about Commodities and Energy stocks given structural supply/demand drivers and geopolitical risks.

The Russian invasion of Ukraine on February 24 kicked off historic policy actions and moves across global markets. The Russian ruble continues to reach all-time lows and the Russian equity market has remained closed since February 25, while oil has surged over the $130 per barrel (bbl) mark for the first time since 2008 and gas prices have spiked to all-time highs. The global coordination of sanctions has included the European Union (EU), the U.S., the U.K., Canada, Switzerland, Japan, Australia and Taiwan. Russia’s invasion of Ukraine will slow global growth and raise inflation. We view the macroeconomic impact largely through the commodity markets, while the financial linkages between Russia and the rest of the world are comparatively smaller. We project a high risk of large energy supply disruptions, with Brent oil price to remain elevated between $100-185 bbl given the possibility of more severe sanctions. The Russia-Ukraine crisis is a low earnings risk for U.S. corporations.

The graphic above illustrates the historical 12-month subsequent market recovery (+15.4 to +43.6%) after market pull backs and low consumer sentiment.


Employment and Interest Rates
As we mentioned last quarter the era of rock-bottom interest rates may finally be ending. Many of you may remember when money market funds paid 8.0% and a good mortgage was anything under 10%. Those days are not coming back exactly, but we are in for a steep increase to slow demand and reduce inflation. The recent jobs report shows a booming labor market which will put further pressure on the Federal Reserve to tighten aggressively in the months ahead. The payroll job gains of 431,000 was slightly lower than consensus expectations of 490,000 but the March gain looks more impressive given upward revisions of 95,000 to the prior two months. The unemployment rate fell from 3.8% to 3.6%. This means unemployment is now lower than in all but 5 months of the last 52 years. Importantly, this means the unemployment rate is now just 0.1% above the Fed’s 3.5% forecast for both the end of 2022 and 2023. Average hourly earnings grew by 0.4%, in line with consensus expectations. However, with an upward revision to the February numbers, the year-over-year gain in average hourly earnings hit a recovery high of 5.6%. Labor force did rise by 418,000 in March. However, crucially this mostly reflects a 357,000 reduction in the number of people who said they were not looking for a job because of the pandemic. This suggests that higher wages are not pulling many extra workers back into the labor force and with a dwindling number of 874,000 who are still out of the labor market due to the pandemic, labor force growth may be mediocre in the months ahead. There are now a record 5.3 million more job openings than unemployed workers in America and this morning’s report suggests this imbalance is going to hang around, putting steady upward pressure on inflation. For investors, the clear implication is to get ready for an even more hawkish Fed and higher interest rates.

COVID and COVID economic recovery indicators
Based on recent data through March 29,2022 there are 6 states with increasing COVID daily cases New York, New Jersey, Connecticut, Massachusetts, Rhode Island, and Illinois. China is 35 days into its Omicron surge and has shut down the entire city of Shanghai (26 million people). The number of hospitalizations and fatalities from COVID have fallen dramatically and we have now shown we can treat the virus effectively around the world. Things are not back to normal, but they are getting there as is illustrated in the “high-frequency data” chart below right. It illustrates credit/debit card transactions, hotel occupancy, restaurant diners, and TSA air travel numbers. The 0% line is the baseline pre-COVID average and you can see many of these categories are at or near their expected average rate.

Thank You
We want to sincerely thank you for your continued confidence in allowing us to serve you. It is especially important in times of volatility that we make sure your portfolio is aligned with your objectives. If you would like to schedule some time together, please give us a call.


Jay W. Branson CFP®, ChFC
4th Quarter Commentary 2021

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