Weekly Economic Update: April 18th 2022

ALL
BLOG
VIDEO
NEWS
PRESS
FAQ
Newsletter - 18 - 04 - 22

 

For more financial news and resources, visit our Insights page ⇒

 


 

April 18th, 2022

Author: SteelPeak Wealth –  Institute of Portfolio Management

Equity markets slid last week as a confluence of developments whipped markets back and forth. The S&P 500 fell 2.4% and the yield on the 10-year treasury reached 2.82%, the highest level since December 2018. Financial markets are keenly focused on inflation and the impact it is having on central bank policies around the world. In recent weeks, Russia and Ukraine appeared to be making progress on negotiations, but talks reportedly stalled last week while crude oil jumped 10% higher, which stoked fears of higher inflation.

There is a simple relationship between inflation and asset prices. Inflation and interest rates are positively correlated. As inflation rises, bond investors require a higher interest rate to compensate for the diminished purchasing power over the life of a bond. As interest rates rise, asset prices decline (all else being equal).

A simple analogy is the relationship between the value of a home and the interest rate on a mortgage. As mortgage rates fall, the monthly payment required to purchase the home declines. This increases to pool of potential buyers as more people can afford the home. More buyers create additional demand and pushes the home price higher. As mortgage rates rise, the inverse happens, and the home price declines. Keep in mind, there are numerous other factors that impact asset prices. For example, mortgage rates are currently rising, but home prices continue to rise due to strong job growth and rising wages.

Last week, the Consumer Price Index was released for the month of March. The index showed that prices rose 8.6% over the last year; the largest increase in nearly 40 years. However, core inflation which removes food and energy, was unchanged from the prior month at 6.4% (below right). Month-over-month changes reveal a more pronounced bifurcation between headline and core CPI. On a monthly basis, core CPI has been declining since October while headline inflation spiked. This suggests the bulk of our inflation problem is due to higher food and gas prices, both of which have been impacted by the war in Ukraine.

 

While crude oil prices were higher last week, they are still down from the highs we saw last month (below, left). If crude oil prices stabilize, we are likely near the peak of the current inflation scare. Below is a simple diagram that illustrates the relationship between asset prices and inflation (below, right). As inflation rolls over, interest rates will likely peak, alleviating downward pressure on asset prices. Last week’s inflation data suggests we are somewhere near the red circle on the diagram. Again, there are many other factors that influence the price of assets, but since inflation is front and center, we expect changes in inflation to have an outsized impact on prices.

 

Investor sentiment remains extremely negative. Last week’s AAII investor sentiment survey showed less than 16% of individual investors had a bullish view on markets; the lowest reading since September 1992. Historically, there is an inverse relationship between investor sentiment and forward returns for the S&P 500. Below we show every instance when the bullish reading was below 18%, and the subsequent returns over several time periods. It’s worth pointing out that many of the readings in the table below occurred during the 1990 Gulf War when, much like today, crude oil and inflation spiked.

As is always the case with investing, if you exercise patience and lengthen your time horizon, your odds of success improve significantly.

 



T I P   O F   T H E   W E E K


Self-employed? Have your accountant look at your balance sheet and profit-and-loss statement before the year ends. Some tax-saving strategies may come to mind, and an up-to-date set of books means less work for your tax preparer.

_____________________________________________________________________________________

THE WEEK AHEAD: KEY ECONOMIC DATA

Tuesday: Housing Starts.

Wednesday: Existing Home Sales.

Thursday: Jobless Claims. Index of Leading Economic Indicators.

Friday: Purchasing Managers’ Index (PMI) Composite Flash.

Source: Econoday, April 14, 2022

The Econoday economic calendar lists upcoming U.S. economic data releases (including key economic indicators), Federal Reserve policy meetings, and speaking engagements of Federal Reserve officials. The content is developed from sources believed to be providing accurate information. The forecasts or forward-looking statements are based on assumptions and may not materialize. The forecasts also are subject to revision.

THE WEEK AHEAD: COMPANIES REPORTING EARNINGS

Monday: Bank of America Corporation (BAC), J.B. Hunt Transport Services, Inc. (JBHT).

Tuesday: Netflix, Inc. (NFLX), Johnson & Johnson (JNJ), International Business Machines Corporation (IBM), Lockheed Martin Corporation (LMT), Prologis, Inc. (PLD).

Wednesday: Tesla, Inc. (TSLA), The Procter & Gamble Company (PG), Lam Research Corporation (LRCX), CSX Corporation (CSX).

Thursday: AT&T, Inc. (T), United Airlines Holdings, Inc. (UAL), Snap, Inc. (SNAP), Blackstone, Inc. (BX), Union Pacific Corporation (UNP), Dow, Inc. (DOW).

Friday: Verizon Communications, Inc. (VZ), American Express Company (AXP), KimberlyClark Corporation (KMB).

Source: Zacks, April 14, 2022

Companies mentioned are for informational purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. Companies may reschedule when they report earnings without notice.

_____________________________________________________________________________________

Q U O T E   O F   T H E   W E E K

 

“You can’t use up creativity. The more you use, the more you have.”

MAYA ANGELOU

_____________________________________________________________________________________

 

_____________________________________________________________________________________

 

T H E   W E E K L Y   R I D D L E

How much dirt is in a 2-foot diameter hole that is 4 feet deep?

LAST WEEK’S RIDDLE: When you take away the whole from this, you still have some leftover. What is it?

ANSWER: Wholesome.

_____________________________________________________________________________________

SteelPeak Wealth –

Institute of Portfolio Management

For more financial news and resources, visit our Insights page ⇒

 


 
Steel Peak Wealth Management, LLC (“SteelPeak Wealth”) is an SEC registered investment adviser located in California. There is no guarantee that any views, projections and/or opinions expressed herein will come to pass. This report should not be construed by any prospective investor as SteelPeak Wealth’s rendering of any personalized investment advice. Information on the registration status of SteelPeak Wealth is available at www.adviserinfo.sec.gov. A copy of SteelPeak Wealth’s current written disclosure brochure is available upon written request.
Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.
The forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.
The market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results.
The Dow Jones Industrial Average is an unmanaged index that is generally considered representative of large-capitalization companies on the U.S. stock market. Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of technology and growth companies. The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) and serves as a benchmark of the performance of major international equity markets, as represented by 21 major MSCI indexes from Europe, Australia, and Southeast Asia. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.
U.S. Treasury Notes are guaranteed by the federal government as to the timely payment of principal and interest. However, if you sell a Treasury Note prior to maturity, it may be worth more or less than the original price paid. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.
International investments carry additional risks, which include differences in financial reporting standards, currency exchange rates, political risks unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater share price volatility.
Please consult your financial professional for additional information.

Certain information contained herein has been provided by, or obtained from, third party sources. While SteelPeak Wealth believes that such sources are reliable, it cannot guarantee the accuracy of any such information and does not represent that such information is accurate or complete.

CITATIONS:
1. The Wall Street Journal, April 14, 2022
2. The Wall Street Journal, April 14, 2022
3. The Wall Street Journal, April 14, 2022
4. CNBC, April 12, 2022
5. The Wall Street Journal, April 13, 2022


Share