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3 Economic Factors To Monitor Next Quarter

Written by Barbara Caknupp | Apr 7, 2022 4:16:27 PM

By Tim Courtney, Chief Investment Officer

So far, 2022 has seen an increase in market volatility and the first correction in two years.1 It’s not nearly as easy an environment as investors experienced in 2021, but we expect things to settle somewhat as we move from the first half to the second half of the year.

Now that the first quarter has come to a close, here are three factors we’ll be watching for in the second quarter:

    1. Geopolitical conflict: To start the year, global markets were performing relatively well and widespread supply chain issues were slowly healing. When Russia invaded Ukraine, existing supply chain problems were exacerbated2 and markets became volatile, especially in the pricing of commodities.3 Recovery slowed not only in European economies but around the globe. The longer the conflict lasts, the longer it will take to correct supply chain issues and resume global recovery. We’re hopeful that an agreement will soon be reached to end the invasion.
    2. Interest rates and inflation: With the 10-year Treasury yield hovering around 1.7% at the beginning of the year,4 interest rates remained stubbornly static for months even after the Federal Reserve communicated its plan to raise them. Oddly enough, it wasn’t until weeks after the invasion of Ukraine that interest rates began moving higher. Often rates will fall during times of rising uncertainty and market stress. Rates started steadily rising in mid-March and the 10-year is now sitting at approximately 2.6%.4 While this hike is significant over only a few weeks, we believe it is healthy and expect the rate may rise a bit more. We don’t believe interest rates will become so high that the economy would slip into recession, but there will be consequences such as higher mortgage rates and increased borrowing costs for businesses that will start filtering through the economy, especially if rates continue to rise at this fast clip.
    3. Year-end earnings and corporate profits: It seems that companies have had a decent first quarter considering supply chain issues and the higher cost of commodities and labor. Many companies felt comfortable raising their prices.5 Last year saw a huge surge in earnings, so it was expected that the first couple of quarters in 2022 would reflect some consolidation with stronger earnings later in the year. That scenario is still a good possibility, but we want to see guidance numbers continuing to be strong.

While investing always entails risks, these are elevated following the easy environment in 2021 that featured low interest rates, high valuations, strong GDP and consumer spending. Changing that scenario to include a war in Europe, rising interest rates and higher inflation means that returns won’t be generated so easily. If full year earnings come close to hitting their current estimates, markets should end the year on a positive note. Even with the challenges, there seems to be enough momentum in the economy and household financial health to continue growth and set a new earnings record in 2022.

Sources:

  1. Yahoo! Finance (3/21/22) — S&P 500
  2. The New York Times (3/1/22) — Ukrainian invasion adds to chaos for global supply chains
  3. MarketWatch (3/31/22) — Bloomberg Commodity Index
  4. CNBC (3/30/22) — U.S. 10 year Treasury
  5. CNN (3/2/22) — Big companies aren’t shy about raising prices

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

 

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