Greetings! I hope that you had a nice March and that you are ready for Spring. In Florence, we’re digging out from our pollen storm, and it’s been a beautiful time to be outside, if your allergies can stand it!
In March, US stock were higher after two months of declines to start 2022. The S&P 500 gained on nine of eleven days late in the month to come close to its early January all-time high before pulling back at the end of the month. Bonds were in focus, as yields continued their climb. That can be bad for stocks, at least in the short-term, as higher bond yields might entice some stock investors out of stocks and into the perceived safety of bonds. I probably don’t have to tell you this, but oil and gas also had solid gains.
Inflation remained a critical concern, with a February report showing a year-over-year rise of 7.9%–the fastest pace since 1982. This may mean that the Federal Reserve will raise short-term interest rates aggressively, which in turn will stoke recession fears. The Fed announced the predicted liftoff of interest rates with a ¼% hike at their March meeting. Chairman Powell suggested there may be a need for the Fed to move “expeditiously,” meaning that more rate hikes could be coming, and perhaps ½% moves rather than ¼%.
I’ve written about this in the past, but the early stage of interest-rate tightening usually does not predict lower stock prices. On average, the opposite is true; stock prices move higher. It’s usually the end of the cycle, when the Fed announces that no more hikes are necessary (presumably because they have successfully slowed growth down), that marks the beginning of stock market pullbacks. Each rate-hiking cycle is different, but I don’t think that we are in immediate danger from a recession.
Rising interest rates, higher home prices, and thin inventories continued to weigh on the housing market, with February’s data showing monthly declines in home sales, although housing starts recorded their highest annualized pace since 2006. I’m keeping a close eye on this, but I am of the opinion that we are facing a housing shortage, and that homebuilding could, and should, continue at a rapid pace.
While inflation is hot, interest rates have moved higher, and commodity prices are rising, consumer demand has remained very resilient. There is some recent evidence that consumers may be scaling back their purchases of staples, but consumers and corporations alike are in very good financial shape, with generally high levels of cash and generally low levels of debt (I think you could argue that this is because the debt has been transferred to governments in the form of stimulus). This has allowed sales growth to offset the higher costs from inflation, resulting in stable profits for corporations. The longer those pressures persist, however, the bigger the headwind will become to companies–and the economy. But for now, corporate earnings trends remain solid, which is supportive of higher stock prices.
The stock market moved above some key technical levels late in March, quickly rebounding from the Russia-Ukraine based correction. I think the market went from a “flashing red” signal (think of coming to a four-way stop at an intersection) to a “flashing yellow” signal. We no longer have to come to a complete stop before proceeding, but we’d be wise to slow down and look both ways. There is a lot of financial and economic data that is quickly changing, so I think being patient, and buying on stock pullbacks, is wise now.
If you’d like to hear me talk more about the market, I’ll be joining Chip and Jon Tait (a member of our Investment Committee) on their podcast, The Signature Life Show, every month beginning Friday, April 15. You can listen and subscribe anywhere you listen to podcasts. Here’s the link to Apple that I use: https://podcasts.apple.com/us/podcast/the-signature-life-show/id1615788012
Speaking of April 15th, the stock market will be closed that day in observance of Good Friday, so our offices will be, too. And don’t forget that April 18 is Tax Day – the deadline to file your return and pay taxes or request an extension. Also, first quarter estimated tax payments are due, if required. That’s also the last day to contribute to traditional and Roth IRAs or health savings accounts for 2021.
Have a great April! Doesn’t hesitate to call your financial advisor should you need us.