After two consecutive bizarre years, would it have been too much to ask to have some sense of normalcy during the first quarter of 2022? Apparently it was. January started off poorly, and things only seemed to get worse through the end of February.
Stocks started the year in the red due to pretty standard seasonal factors. However, given the outsized returns of the past three years, some investors sold into the sell-off in sort of a reverse “fear of missing out” trade. This was undoubtedly due to nontransitory inflation, which had been plaguing, and continues to plague, the economy. At some point, the Fed was going to have to do something. But when and how?
With this on investors’ minds, the last thing anyone needed was a war in Europe. Unfortunately, that was exactly what we got when Russia invaded Ukraine. This surprised and didn’t surprise everyone at the same time. Not surprisingly, we had to worry whether the conflict would escalate and expand into other European, namely NATO, countries, forcing the U.S. to get involved.
Of course, all of this sent commodity prices through the roof, this at a time when the Consumer Price Index (CPI) was growing at its fastest pace in decades. Again, at some point, the Fed was going to have to do something. But when and how?
Finally, on March 16, the Federal Open Market Committee met and announced it was going to raise the overnight lending target by 25 basis points, or 0.25%. Further, it telegraphed an additional 150 basis points in rate hikes by the end of the year. Curiously enough, this seemed to calm investors. Essentially, they breathed a sigh of relief knowing the Fed was still in control, their fingers crossed.
Further, by this point it appeared the conflict wasn’t going to spread and that the Russians might not be as formidable as originally feared. This, too, soothed frayed nerves. By the end of the quarter, worries started to ease.
This takes us to the second quarter of 2022, with a strong economy, cheap money and lots of it, strong labor markets, healthy personal balance sheets and continued corporate profitability. That isn’t a bad way to start. At least we don’t think it is.
We hope you find our insights into the events of the first quarter and where we stand for the remainder of the year helpful. Obviously, no one can look into the future with crystal clarity. However, by anticipating potential changes, we can capitalize on them for our clients’ benefit.
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