In this latest installment of our quarterly newsletter, we share our observations on the first quarter of 2022 and our outlook for the remainder of the year. Click here to go to the full report on our website. Following are highlights:
- Equity markets had a rough start to the year. Fears of high inflation and rising interest rates, combined with the geopolitical shock of Russia’s invasion of Ukraine, sent the S&P 500 index into correction territory in late February, its first such correction since the onset of the pandemic in March 2020. For the quarter, the S&P logged a return of negative 4.6% through March 31, 2022.
- The bond market also posted losses, with the benchmark Bloomberg Barclay’s Aggregate U.S. Bond Market index down 5.9% for the quarter, as falling bond prices exceeded the return of the interest payments on low-yielding bonds.
- Russia’s invasion of Ukraine in late February shocked the world and shifted investors’ focus momentarily from inflation and interest rates to geopolitics. Although Russia accounts for less than 2% of global GDP, it is a major producer of oil, natural gas and other commodities, prices of which have been rising sharply since February.
- U.S. consumers suddenly were faced with skyrocketing gas prices at the pump and food prices in the grocery store. The U.S. Consumer Price Index, or CPI, the broadest measure of inflation, increased at an annualized rate of 8.5% in March, its highest rate in four decades.
- The Federal Reserve Bank’s primary tool to combat rising inflation is to raise short-term interest rates. In response to recent trends, the Federal Reserve took the long-anticipated action of raising the short-term fed funds rate at its March meeting, hiking the rate by a quarter percentage point to a range of 0.25% to 0.50%, its first rate increase since 2018.
- The odds now favor a 0.50% hike in the fed funds rate in May, followed by another 3-4 half-point increases before the end of the year. This will have an especially dampening effect on consumers who carry credit card debt, auto loans, and home mortgages.
- Despite all the uncertainties, the U.S. economy remains solid by most measurements, albeit slowing. Real U.S. GDP growth is forecast to be 3.3% for 2022, down from 5.7% in 2021, but above the historical average of the last twenty years.
- U.S. unemployment hit a post-pandemic low of 3.6% in March 2022, down from a high of 14.7% in April 2020. As unemployment has declined, wages have continued to climb, rising 5.6% year-over-year in March, the largest increase in decades.
- U.S. corporate earnings, which are the major driver of stock market performance, continue to show a steady recovery from the pandemic low point. Consensus estimates for 2022 are for S&P 500 earnings to grow 9% to $227 per share, from $208 per share in 2021.
- While we expect market volatility to continue in the near term, we remain cautiously optimistic that the U.S. economy will post positive growth this year, corporate profits will increase, and the U.S. stock market will continue to move higher.
- Our response to current market and economic conditions is to stay the course with high quality, value-oriented, dividend-paying equity and income investments through our disciplined process of individual security selection. We continue to avoid long-term, fixed-rate bonds, which are particularly vulnerable to rising interest rates.
The Edgemoor Team
