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March 14th, 2022
This week, the Fed is widely expected to raise interest rates for the first time since December 2018. With so much attention on inflation, markets will be looking for clues as to how many times the Fed plans to raise rates this year.
Last week’s inflation reading showed consumer prices rose 7.9% over the past year through February. Unfortunately, the recent spike in gas prices has largely occurred during March, and thus are not reflected in the last week’s report. Unless oil prices reverse quickly, we expect to see higher inflation readings in the months ahead. While our elected officials try to point blame at the current situation in Eastern Europe, high inflation readings started back in 2020. Below is a graph of monthly inflation readings going back 10 years. The red circles mark spikes in inflation that came within months of the passing of the CARES Act in March 2020, and the American Rescue Plan in March 2021.
From an investment standpoint, the “logical” conclusion would be to invest in those companies that benefit from inflation, namely energy and material stocks. The problem is what is logical today is likely already priced into financial markets. Below is a graph of the year-to-date performance of XLE (Energy Sector ETF), XME (Metals & Mining ETF), and SPY (S&P 500). While the broad S&P 500 is down 11%, energy and metals are up 38% and 30%, respectively.
Significant outperformance over a 3-month period is not by itself a reason to shy away from an investment. However, when an investment theme becomes mainstream, it often means much of the outperformance has already occurred. Those who invest after something seems logical, are often too late. The hard part is measuring how “mainstream” something has become. One approach is to look at Google search data for the term “Inflation”. In the first two weeks of March, there have already been twice as many searches for the term inflation than any month since 2004 (see below).
Zoom Communications and Moderna both experienced enormous growth over the last two years and both stocks were among the top performers in 2020 and 2021. The number of Google searches for both “Zoom” and “Moderna” spiked and have since declined as the pandemic subsided and the economy reopened. Today, both stocks are down more than 70% from their all-time highs reached during the pandemic.
Today, all attention is on the price of crude oil and gas as both are significantly impacted by the war in Ukraine. Due to the level of news coverage surrounding the invasion, energy has also become an obvious investment theme. After all, much of the developed world placed sanctions against Russia which produces roughly 10% of global oil supply. In the immediate days following the invasion the price of crude oil jumped 44% (from $90 to $130) but have since given back much of those gains (from $130 to $102).
Whether it’s energy stocks that benefit from a short-term spike in crude prices, or Zoom and Moderna that benefitted from the pandemic, we believe investors should be skeptical of any investment that seems too obvious. Rather than investing based on headlines, the focus should be on investing within a disciplined process that can generate long-term returns while helping manage risks. Building such a process is much more difficult than simply turning on the news, but great things don’t come easy.
T I P O F T H E W E E K
What do your children know about money? There’s never a wrong time to talk to your children about its value and impact.
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THE WEEK AHEAD: KEY ECONOMIC DATA
Tuesday: Producer Price Index.
Wednesday: Retail Sales. Federal Open Market Committee (FOMC) Announcement.
Thursday: Housing Starts. Jobless Claims. Industrial Production.
Friday: Existing Home Sales. Index of Leading Economic Indicators.
Source: Econoday, March 11, 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: Coupa Software, Inc. (COUP).
Thursday: FedEx Corporation (FDX), Dollar General Corporation (DG).
Source: Zacks, March 11, 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.
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Q U O T E O F T H E W E E K
“The strongest of all warriors are these two — Time and Patience”
LEO TOLSTOY
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T H E W E E K L Y R I D D L E
You are at sea, it is mid-July, and your ship has reached a unique spot on earth. If you sail north, it will be summer; if you sail south, it will be winter. If you sail east, it will be Friday, but if you sail west, it will be Saturday. Precisely where in the world are you? (Hint: your ship is in the Pacific Ocean, near the island nation of Kiribati.)
LAST WEEK’S RIDDLE: There is a word (four letters long) that begins with the letter I. If you put the letter A at the front of this four-letter word, it becomes a five-letter word which is pronounced exactly the same. Name both words?
ANSWER: Isle and Aisle.
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SteelPeak Wealth –
Institute of Portfolio Management
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CITATIONS:
1. The Wall Street Journal, March 11, 2022
2. The Wall Street Journal, March 11, 2022
3. The Wall Street Journal, March 11, 2022
4. The Wall Street Journal, March 10, 2022
