Our domestic stock market has had its worst Y-T-D start since 1939001 with the DOW having its longest weekly losing streak since 1923002. The long-awaited rotation from Growth stocks to Value stocks003, which are more reasonably priced, may finally be upon us. Also, because of rapidly rising interest rates, Bond funds are suffering their worst rout since 1994004. High energy costs, labor shortages as well as supply chain problems that linger on, exacerbate the investment landscape. In addition to the turmoil from the above anomalies, China’s COVID pandemic lockdown further disrupted supply chains005.
U.S. Gross Domestic Product shrank at a 1.4% annual rate in the first quarter006. Consumers remain resilient while economic stimulus is fading as stagflation, a term coined in the 70’s, is once again being bandied about. To combat inflation, the FED began raising rates, which briefly inverted the yield curve. All recessions since World War II have been preceded by an inverted yield curve007 but NOT all inverted yield curves have led to recession. Also, the unwinding of the FED’s balance sheet, which now exceeds 9 trillion dollars, represents a quantitative tightening008 and headwind for the economy. The strong dollar created by higher US interest rates will negatively impact domestic exports and non-dollar denominated assets.
Just-in-time supply chains produced hefty corporate profits but are vulnerable to unexpected events, such as tariffs, labor shortages, wars, and pandemics, has companies rethinking supply chains009. Labor shortages are further exacerbated by a skills gap010 in the labor market with no quick fix available. Supply-side dynamics, in conjunction with the unprecedented fiscal stimulus in response to the global pandemic has triggered levels of inflation that have NOT been seen for 40 years011. While inflation may moderate012 from these elevated levels, inflation will likely persist at a higher rate.
Another complication of today’s world is that of Russia’s invasion of the Ukraine, which has resulted in the Russian economy suffering its worst collapse in three decades013 because of Western sanctions. Russia’s economic isolation and ostracization is being referred to as Cold War II 014. Shortages and higher food costs have resulted from Ukrainian’s disrupted agricultural exports, which had been the breadbasket of the world015.
Due to increasing costs and aforementioned problems, corporate profit margins have eroded somewhat, which has negatively impacted corporate profitability. Soaring costs and swollen inventory has hurt brick-and-mortar retailers’ profit. Companies missing projected quarterly earnings are being severely punished in this market selloff. A fragile stock market confronted with rising bond yields may obsolete the TINA trade016, short for There Is No Alternative to stocks, as bonds heighten, dividends can now provide a viable alternative. Also, mid-term election years have historically caused market corrections and increased market volatility017.
The U.S. economy remains resilient but risks remain018. With consumer confidence hitting a decade low019 as consumers struggle with higher prices for food, fuel, and shelter020, 2022 will likely be a challenging investment environment. Struggling consumers could eventually lead to demand destruction021 and product substitutions.
This too shall pass but Caution is still the watchword! In reality, the market has taken back much of last year’s unexpected, outsized gains. The current market swoon has brought stocks back closer to historic valuation metrics if expected earnings are met. It may be a good time to consider rebalancing or reevaluating your overall portfolio, especially for those nearing retirement. The rebalancing process, which restores a portfolio back to its desired risk profile, is a technique utilized for managing risk to ensure proper asset allocation & diversification pursuant to your investment needs, objectives and risk tolerance.
If you have concerns with your portfolio because of market volatility or geopolitical events, a member of the Iron Belt Partners Team will gladly discuss those concerns and schedule an appointment to meet if necessary.
We can be contacted via phone at (724) 493-9473 or via Email at:
Lindsay M. Turchetta LTurchetta@lpl.com
John D. Martin JDMartin@lpl.com
Working as a Team to better serve our clients.
This communication is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. You should consult your tax, legal, and/or financial advisor prior to making any financial decisions. The views expressed here are those of the authors, John Martin & Lindsay Turchetta, and not necessarily those of LPL Financial. Information is based on data gathered from what are believed to be reliable sources. The opinions, and other information contained in this article are subject to change continually and without notice of any kind. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time and may not come to pass.
All performance referenced is historical and NO guarantee of future results.
Investments are not guaranteed and are subject to investment risk including the possible loss of principal.
The index references herein are unmanaged and cannot be directly invested into.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. No strategy assures success or protects against loss.
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC
Iron Belt Partners is a separate entity and not affiliated with LPL Financial.
Rebalancing, diversification and asset allocation strategies do not assure a profit or protect against loss in declining markets. They are methods used to help manage portfolio risk. Also, rebalancing may have fees and tax consequences so please consult with a tax and financial advisor prior to making financial decisions.
001 Source: “Fed balance sheet drawdown coming” on Morningstar.com by Mark DeCambre
002 Source: “DOW is on its longest weekly losing streak since 1923” on cnn.com by Matt Egan
003 Source: “Why U.S. Value stocks are poised to outperform growth” on investor.vanguard.com by Kevin DiCiurcio
004 Source: “Bond Market Suffers Worst Quarter in Decades” on wsj.com by Sam Goldfab
005 Source: “Supply chains - 'Complete chaos for the shipping industry'” on finance.yahoo.com by Dani Romero
006 Source: “U.S. GDP fell at a 1.4% pace to start the year” on cnbc.com by Jeff Cox
007 Source: “Economic Forecasts with the Yield Curve” on FRBSF by Michael Bauer and Thomas Mertens
008 Source: “Fed balance sheet drawdown coming” on metro.us by Metro US
009 Source: “Rethinking just-in-time supply chains” on blockheadtechnologies.com by Danielle Enwood
010 Source: “The Skills Gap is Real” on ust.com by Leslie Schultz
011 Source: “The worst inflation in 40 years” on msn.com by Sarah Foster
012 Source: “Market will break out of slump due to peaking inflation” on cnbc.com by Stephanie Landsman
013 Source: “Russia privately admits its economy is facing biggest collapse in three decades” on theworldnews.net
014 Source: “Historian Niall Ferguson details 'Cold War II'” on finance.yahoo.com by Aarthi Swaminathan and Michael Kelley
015 Source: “Russia’s Ukraine invasion is a threat to the world’s breadbasket” on Associate Press by Joseph Wilson and Aya Batrawy
016 Source: “Why a fragile stock market faces danger from rising real yields as 'TINA' trade fades” on Dow Jones by Vivien Lou Chen
017 Source: “A Historical Perspective on Midterm Election Year” by Guggenheim
018 Source: “U.S. Economy Remains Resilient, But There Are Risks Ahead” on seekingalpha.com by James Knightley
019 Source: “Consumer Sentiment Hits New Low in Early March 2022” on Investopedia.com by Mark Kolakowski
020 Source: “There is ‘nowhere to hide’ for consumers as inflation hits food, gas, housing” on cnbc.com by Greg Iacurci
021Source: “What Is Demand Destruction?” on Investopedia.com by Adam Hayes