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April 5, 2022
As we start a new quarter, headwinds include inflation, less-accommodative Fed monetary policy, and geopolitics.
The most important factor, however, is the impact to consumer spending from inflation and to corporate earnings from rising interest rates.
Inflation still sits near a 40-year high as we start the second quarter and with major commodities such as oil, wheat, corn, and natural gas surging in response to the Russia-Ukraine war, it’s unlikely that key inflation indicators like the Consumer Price Index will decline anytime soon.
Until there is a definitive peak in inflation, the Federal Reserve is likely to continue to aggressively raise interest rates, and over time, higher rates will become a drag on economic growth.
The Federal Reserve warned markets that aggressive interest rate hikes are coming in the months ahead, and this quarter we expect the Fed will reveal its balance sheet reduction plan, which will detail how the Fed plans to unload the assets it acquired via the Quantitative Easing program over the past two years.
If the details of this balance sheet reduction plan are more aggressive than markets expect, or the Fed commits to more or higher rate hikes than are currently forecasted by markets, that could weigh on stocks and bonds alike.
Current Market Expectations for Rate Hikes
Finally, the Russia-Ukraine war continues to rage on, and the geopolitical implications have spread beyond the battlefield, as relations between Russia and the West have hit multi-decade lows.
The crippling economic sanctions against Russia remain in place which will cause commodity prices to remain elevated, and the longer those factors persist, the greater the chance we see a material slowdown in the global economy.
The U.S. economy is very strong, and unemployment remains historically low, and that reality is helping support asset markets.
Interest rates are rising but remain far below levels where most economists forecast that they will begin to slow the economy. Consumer spending, which is one of the main engines of growth for the U.S. economy, is robust, and corporate and personal balance sheets are healthy.
We expect continued volatility across asset classes in the short term, even as core fundamentals remain very strong, and U.S. corporations and the U.S. consumer are, broadly speaking, financially healthy.
So, while risks remain, as they always do, multiple positive factors exist supporting markets at present.
At Traders Reserve, we’re paying attention to the risks facing both the markets and the economy, and, more importantly, to your portfolio and will help you understand how to attack markets, not run away from them.
Successful trading is a marathon, not a sprint, so, as difficult as it can be, it’s critical for you to stay invested, remain patient, and stick to your plan, whichever service or services of ours you are following.
And if you aren’t following one of our services, you should be, as we continue to provide market-leading returns across our investing and trading products.
Rest assured that our entire team will remain dedicated to helping you successfully navigate this market environment.
Now, let’s go kick some … buckets of income over in the second quarter.
John Hutchinson and David Durham
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