Broker Check

Early 2022 Market Commentary

| May 04, 2022

Let’s take a look at what’s going on today. We are two years into a global pandemic, commodity prices are moving upward, inflation has risen significantly, the Fed is raising interest rates, recession worries are spreading, and there is a war in Europe. We have seen more market volatility in the first quarter then we have seen in the last several years.

Unfortunately, stock markets do not measure how you feel. Business valuations do not necessarily go down just because you feel bad. Some businesses are worth more when you feel bad, such as the businesses that produce the commodities whose prices are rising.

Let’s talk about the worries that we have today. One less concern is the pandemic. In the U.S. and the Western world (where most of our companies do business), immunities are building thanks to high vaccination rates and natural immunity from prior infections. COVID-19 is certainly not gone, but hospitalizations in the U.S. are down significantly, even as new variants keep coming along.

Inflation is a more complicated matter. Two complications to this have been the pandemic and the current war. We’ve had a lot of money printing which in turned caused too much money chasing fewer goods. Due to production and delivery constraints, prices increased. Consumer price inflation is always the result of high demand combined with a constraint in supply. Over the last decade inflation has been below average. We have had globalized production, technology and deregulation keep the supply of goods growing and prices have remained low. Unfortunately, with the war we have a new set of constraints that have shocked the supply chain. When supply is low, prices will increase.

The war has worsened inflation in two ways. First, the costs of many commodities produced in Russia and Ukraine have risen dramatically due to the direct effects of war-related supply reductions. Such commodities are oil, natural gas, nickel, palladium, neon, titanium, potash, uranium, and wheat. These are basic commodity inputs for many goods, and their rising costs have rippled through the economy.

The second impact is an indirect link by the Western powers, led by the U.S., to deny Russia access to global trade and the global financial system is accelerating the deglobalization of the world economy. A deglobalized world is a higher cost world since goods might not be produced at their lowest cost location but at their most secure location for movement to market.

Lastly, we have the Fed. After many years of stimulating the economy with ultra-low interest rates and trying to create inflation, the Fed is in panic mode now that inflation is here. Unfortunately for investors, the only tool the Fed has is a hammer to reduce demand. That is, they can slow down the economy to match demand with the lower supply. So, what’s an investor to do? We have seen this drama before; it played throughout the 1960s and 70s. In fact, what we learned from that time period is that equities give investors a better opportunity to battle inflation than most other asset classes.

Yes, there is always a lot on our minds that concern us, that’s part of being an investor. We continue to research and study the markets to help place your investments to the changing and challenging times.

As always, we appreciate your confidence in us.