The year has started off with a relatively volatile market, with the S&P 500 (a widely used gauge of broad stock market activity) down almost 10% by the end of January. We saw additional up and down price swings throughout the quarter, with the S&P 500 ending down 4.6% as of March 31st. There are several reasons for this activity. As we have noted before, markets do not like uncertainty. This quarter has seen uncertainty over lingering effects of COVID on the supply chain, the effects of the war in Ukraine on oil and commodity prices, continued concerns over inflation, and interest rate hikes. Value and dividend paying stocks have performed better during this cycle as investors seek stability and certainty in uncertain times.
Inflation and interest rates
Inflation remains high at 7.9% as of the February Consumer Price Index. Analysts do expect this to drop closer to 3% by the end of the year, in part due to the expected effects of interest rate increases. The Federal Reserve has already begun to raise rates and has outlined a plan to continue to do so throughout the year. The average 30-year fixed mortgage rate has increased from 2.84% in August 20211 to 4.86% as of April 20222, with expectations this will continue to rise as the Fed continues to raise rates. This limits the amount many home buyers can borrow, resulting in cooling pressures on the housing market.
We are seeing some initial signs of inflationary pressure easing. Home prices are cooling in some markets. Purchases of new appliances, home furnishings, and renovations should slow alongside housing. Used car prices, while still high, have now fallen for the last two months.3 Supply chain pressures have eased for some industries as well. While we are still early in this process, we are seeing signs of a return to pre-pandemic spending patterns that will ease some inflation concerns.
Energy prices remain an area of uncertainty. Russia is a large producer of natural gas and oil. The sanctions levied against their producers as a result of their recent invasion of Ukraine has already caused energy prices to increase. Additional sanctions are possible. The impact of oil and gas prices on inflation is difficult to predict as this is tied to war, global demands, and alternate energy infrastructure builds that take time to implement. Increased supply from OPEC is always a possibility, but this coalition has noted a preference for maintaining higher prices and an unwillingness to increase output to offset market losses from Russia.
Secure 2.0 Act
The Secure 2.0 Act is likely to pass near its current form. This will delay the age at which retirement account owners are required to take mandated distributions, allow workers very near retirement to contribute more to their retirement accounts, and allow employers to help employees with student loans save for retirement, amongst other provisions. We are monitoring these changes and will let you know if any affect you personally once the law has been finalized and passed.
We continue to see spoofing, phishing, and other scams proliferate online. Here are some general rules of thumb to keep in mind for your safety:
- Do not click on links from unknown sources. Links in e-mail and text messages can be used to install spyware and other malware onto your device. The same applies to links in poorly maintained websites. Know what you are clicking on before you click.
- Scammers lie. They will pretend to be from a company or person you trust in order to abuse that trust. If you are unsure of an e-mail link, do not use it. Go directly to the company website instead. Do not assume someone calling you is from the company they say they are. Take down the information they give you and call the company back using the phone number listed on their website. Independently verify who you are interacting with via some other channel than how they have contacted you.
- Do not rush. We all make more mistakes when we are in a hurry. Scammers use this to their advantage. They make up false consequences to prod you to make quick decisions. Take your time instead.
- Neither e-mail nor text messaging are secure methods of communication. Do not send account numbers, credit card information, social security numbers, etc. via e-mail or text. Use secure portals, encrypted communications, or tell the provider the information on the phone instead.
The outlook for 2022 is difficult to predict. There are a variety of economic influences both domestically and abroad that will impact market returns. While analysts and news outlets speak of likely outcomes, all are speaking with varying degrees of uncertainty. For now, corporate earnings and job demand remain strong as our economy enters a period of monetary tightening. Our office continues to focus on our client needs, planning for the unexpected, and maintaining diversified portfolios to help achieve account objectives and long-term financial goals.
As a reminder, the federal tax filing deadline is April 18th this year. You can top off IRA or HSA contributions for 2021 at this time if you have yet to file.
The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented, nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.