Weekly Market Update 3/7/2022
Our markets continue to have the jitters over international matters, despite a solid domestic economy. After powerful growth to close out 2021, the rate of growth will likely slow considerably during the current three-month period, compared with the annualized pace of 7.0% recorded in the fourth quarter. Still, the continued strength of the U.S. consumer and housing market should drive further growth this year.
The consumer has loosened the purse strings. The Commerce Department reported that consumer spending jumped 2.1% in January, after declining in the final month of 2021. There also is a growing consensus that the rapid improvement in the public health situation may set the stage for strong consumption growth ahead, with the shift of spending towards services likely to regain some traction.
However, it should be noted that the healthy level of spending was accompanied by a big drop in the personal savings rate and only a nominal increase in personal income. The latter bears watching because if overall wages in dollars increase at a slower rate than consumer and producer prices, it reduces the “real” purchasing power of workers—which is a drag on the economy.
The continued spike in prices is starting to make life more difficult for some consumers. This is not being helped by the surge in oil prices following Russia’s invasion of Ukraine and the retaliatory sanctions imposed by the NATO alliance and other countries. Higher energy costs are hitting consumers at the gas pump and for heating their homes. The annual rate of core consumer price growth, which is closely watched by the Federal Reserve, exceeded 5.0% in January, the highest level since 1983.
The Fed is about to begin tightening the monetary reins. This will likely include the first short-term interest-rate hike since 2018. The central bank hopes this less-accommodative policy will help reduce inflation and promote more stable pricing.
Conclusion: The recent geopolitical turmoil and concerns about inflation have led to a spike in equity market volatility. Thus, we continue to recommend that investors exercise some caution, especially ahead of the fast-approaching Federal Open Market Committee (FOMC) meeting. Equities historically don’t perform as well during periods of more-restrictive monetary policies.