The Old Stuff
In the not-so distant past, Garth Brooks would begin his concerts with a song titled “Old Stuff” with lyrics that included, “…Back when the old stuff was new.” This was an ode to his early days on the road as a performer before he became well-known. For many of the families we work with who happen to be at or near retirement, they began their careers a few decades ago. Do you remember the early days of your career and what has changed? Obviously, you are older and wiser, plus technology has changed significantly as have many of the comforts of life. Unfortunately, we seem to be entering a period of time where we are returning to some of the same circumstances of those early years of your adult life – high energy prices, higher inflation, and east vs. west geopolitical strife, not exactly the “good ol’ days” anyone hoped to be reminiscing about.
Most of the stock market movement over the past week was a result of news related to the situation in Ukraine. When news came that there was progress on the diplomatic front and it was reported the U.S. was banning all energy imports from Russia, the markets moved higher. Conversely when there was news of no diplomatic progress or continued aggression the markets moved backward. Overall, the markets were lower for the week with the S&P 500 and Nasdaq both posting their second consecutive losing weeks and the Dow Jones Industrial Average being lower for the fifth straight week, the longest streak since May 2019. The Nasdaq is now about 18% off its all-time high, set at the beginning of this year, and getting close to bear market territory. The Dow and S&P are lower on the year by about 9% and 12%, respectively. The markets experienced their lowest closes of the year last Tuesday before staging a decent rally on Wednesday. It is worth mentioning the closing lows were not as low as the intra-day lows reached on February 24th. The tech-heavy Nasdaq continues to slowly drop and is still much lower than the other major indices. This provides some indication that attention is turning to interest rates and the upcoming Federal Reserve meeting since higher interest rates have an impact on the present value of future earnings and growth rates, thus affecting the stock prices of growth companies, especially those in the technology sector.
Regarding interest rates, the yield of the U.S. 10-year Treasury bond moved back up above 2.0% last week and shorter-term rates also continued their march higher in anticipation of expected action by the Federal Reserve to raise interest rates at their meeting this upcoming week. At this time, it is highly expected we will see anywhere from five to seven interest rate hikes from the Fed before the end of this year. Their action primarily affects short-term rates, but there is also attention on longer term interest rates whose moves are not greatly affected by monetary policy from the Federal Reserve but rather depend more upon market forces, especially demand for U.S. government bonds, as well as expectations for future growth and inflation.
Not surprisingly, the Consumer Price Index (CPI) report released last week showed that prices increased by the largest amount in 40 years, with inflation now hovering around 8% over the past 12 months. This data is already stale and not representative of current conditions since it does not include the recent spikes in food and energy prices, so we expect future readings to be even higher. Inflationary pressures have been building since supply chain and labor issues erupted during the pandemic, but it was thought these pressures would abate as economic activity returned to pre-pandemic levels. The conflict in Ukraine is causing further supply issues with various raw materials and commodities, some as a direct result of the conflict itself and others due to the sanctions placed upon Russia to stymie the invasion, which is likely to lead to even greater inflation. As a side note, there have been news articles about how some companies have been reluctant to pass on price increases to consumers so instead they are offering less product at the same price. An example being Doritos, where there are now fewer chips in a bag. This is being referred to as “shrinkflation.”
The major event of the coming week will be the Federal Reserve meeting where it is highly anticipated they will raise interest rates by one-quarter of a percent. With increasing inflation some economists think they should take more dramatic action but with the geopolitical events occurring they will be reluctant to makes moves which might cause a shock to the economy. But if we continue to experience high levels of inflation that does not subside, there is a strong possibility the Fed could take more drastic action, in the forms of larger interest rate hikes, to quell inflation before it becomes out of control. Hopefully they do not have to resort to such measures as it could be somewhat damaging to the economy on a short-term basis, even though it might be necessary. Please join me online next Monday, March 21 at 12pm, as I host our Market Huddle to recap the Federal Reserve Report. Click here to register.
Day-to-day market movement will continue to be impacted by events in Ukraine, but it seems at this point the path of least resistance would be to the upside. Should there be a retreat by Russian forces or some sort of lasting ceasefire it is a good bet stock markets will react very positively. Absent a truly horrific event, the worst news is most likely priced into the U.S. markets. There is fear that there could be some contagion in the markets should European banks face difficulty, which they might since many have exposure to Russia. The real estate situation in China which reared its ugly head last fall has taken a back seat to events in Eastern Europe but still exists. There is limited exposure to these risks here in the U.S. so for the time being all seems manageable despite much of the rest of the world seemingly crumbling around us. Let us all hope brighter days are ahead for everyone.
Give us a call if you would like to review your portfolio. With rising interest rates and inflation, we have not seen the likes of since the “good ol’ days” of 40 years ago. This is a very different market than it has been for the past couple of decades so it is imperative you are positioned accordingly to maintain peace of mind in your well-deserved retirement years.
Have a great week!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.
Office phone # 952-460-3260