Our hearts and minds continue to be with the people of Ukraine. We are in awe of the strength of the Ukrainian people and we remain hopeful that a resolution will be achieved.
As we close out the first quarter, various evolving factors continue to drive ups and downs in the market, proving that ‘volatility is back’. The rapid pace of the recovery has spurred a hawkish pivot from the Federal Reserve to contain inflation, while the crisis in Ukraine has driven commodities higher and created geopolitical uncertainty. Yet through these twists and turns, equity markets are down only modestly year to date. After falling into correction territory, the market bounced strongly as fundamentals continue to project strength and markets got more comfortable with higher rates. The Fed finds itself in a tough spot – it needs to hike rates enough to bring inflation under control but without going so far as to trigger a recession. This is a difficult balancing act, and after some criticism for being too slow, the Fed is now playing catch up. It also faces a risk of inflationary factors starting to slow the economy right as it starts to hike. While its certainly no easy task, there are reasons to believe the Fed can successfully ‘thread this needle’.
For one, the economy is less dependent on manufacturing than it was 50 years ago. It has become more services and technology based and with more fluid and inexpensive labor. Additionally, US energy intensity, a measure of energy consumption per dollar of GDP is down 60% since the energy crisis of the 1970’s. So, while pain at the pump and rising wages will have an impact, it is less of an immediate threat than it was during the great inflation of the 70’s. Additionally, indicators such as growth, employment, and profits still remain strong, suggesting the economy can withstand higher interest rates without being derailed. The market actually rallied initially on the Fed’s pivot, which suggests that so far it still believes a “soft landing” for the economy is achievable.
The recent volatility also illustrates the importance of staying invested and reacting with discipline when markets are trading on fear. An interesting statistic is that over all 1-year time frames in the S&P 500 history the index return has been positive 75% of the time. In other words, had you bought the US stock market at any point since 1928, you’d have been up a year later 75% of the time. For a 5-year period, this figure goes up to 89%, and for 20 years, it’s 100%. These numbers illustrate how over the long-term, fundamental factors such as technology, productivity growth, and investment ultimately drive returns, even as wars and economic crises create drawdowns along the way.
We’re certainly not out of the woods, and the impact of inflation and commodity disruptions are still evolving. Supply chains remain in a state of flux and the yield curve is communicating some skepticism on growth even as stocks remain supported. As we move forward, markets will be looking closely at earnings to see whether or not these pressures begin impacting bottom lines. You can be sure that as volatility arises, we’ll be on the lookout for opportunities to add value in your portfolio, as we take a long-term view.
As always, thank you for your continued trust and confidence in our firm. We wish you and your family the best and welcome any comments or questions you have.