Luck of the Irish?
This past week marked St. Patrick’s Day which began as a celebration of one of Ireland’s patron saints, was later carried to the U.S. by Irish immigrants and is now considered to be a celebration of Irish culture. Shamrocks, leprechauns, and pots of gold are all associated with the celebration and considered to be lucky. Somewhat surprisingly, the saying “Luck of the Irish” originated in the U.S. during the silver and gold rush of the19th century when a number of the most successful miners were of Irish heritage. Did the luck of the Irish have something to do with the stock market performance last week?
While we do not want to discount the possibility of having some luck, it is more likely other factors had a greater influence on the markets. As expected, the Federal Reserve raised the Fed Funds rate by a quarter of a percent; the first interest rate increase since 2018. The markets breathed a sigh of relief since it was not a larger move and enjoyed the best week of the year thus far with the S&P 500 gaining a little more than 6%. With this move and the accompanying statement, the Fed provided further clarity about their plans to fight inflation. The markets consider a quarter point rate hike to be rather insignificant and not enough to hinder the market in the short-term. The Fed signaled plans to continue rate hikes at each of the remaining six meetings of the year. Conventional wisdom is short-term rates need to be at least 2% for there to be a major impact on the economy. This threshold could be reached in 2023 if the Fed continues to raise rates; current expectations are they will. If short-term interest rates were to reach that level, we might experience a slowdown in economic activity but for the time being we expect moderate growth to continue. In their statement, the Fed cut their estimate of GDP growth from 4% to 2.8% for the year, noting implications from the Ukraine war. They also raised their outlook for inflation, publicly acknowledging inflation remains elevated and persistent.
The situation in Ukraine continues to place a certain cloud of uncertainty over the markets and there were news reports of progress being made on the diplomatic front as well as stalled progress by the Russians. There is even some speculation the Russians will not be able to sustain their invasion much longer and may possibly retreat but that seems like a very optimistic assessment; one we can all hope for should further diplomatic progress fail to yield results. Despite some progress seemingly being made, the situation remains largely the same so we can assume the market rebound of the past week was mostly driven by the Fed’s action with the Ukraine situation having only a limited impact.
Pots of Gold (and other commodities)
Inflation continues to be a key theme for investors and consumers alike. The sanctions placed upon Russia continue to impact global supply of certain commodities and raw materials. Higher raw materials costs will undoubtedly continue to drive prices higher for many of the essential items we need, such as food and energy. (My wife would argue precious metals, along with diamonds, are also essential.) Oil was slightly higher on the week, gold and silver were lower, with copper and other industrial metals making moves to the upside. Agricultural commodities, such as wheat and corn, were mostly flat with some daily volatility following historic increases the previous couple of weeks. Even though the prices of many commodities seemed to have leveled off, they remain at or near historically high levels and therefore are likely to cause continued inflationary pressures.
It seems the anticipation of the first interest rate hike did more harm than the actual rate hike itself, but it generally takes a few months before the full effects are felt in the economy. With the Fed meeting now behind us, the stock market should again focus on fundamentals such as earnings and growth. The situation in Ukraine will continue to garner headlines and could lead to some short-term volatility. Increasing numbers of Covid cases in China and Europe have the possibility of causing some alarm but we view that as having limited, if any impact, on the markets since at this point it seems we have moved past the pandemic and its impact is less and less. Inflation will continue to be at the top of investors’ and consumers’ minds over the next several months, if not years.
The changing of the seasons brings Spring, which is now upon us and with that, new beginnings. The biggest question now is whether or not the market bounce we experienced last week will continue and are we seeing a transition? Will there be some Luck of the Irish? Our assessment is we will see better markets over the next few months, barring an escalation of geopolitical events. Be sure to give us a call if you would like to review your portfolio. The recent market volatility has proven to be a bit of a wake-up call for many, so it is important for your income plan to withstand the ups and downs of the stock market. To learn more, please join me for our Market Huddle today, Monday, March 20, at 12pm. Click here to register.
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.
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