Gill Capital Partners February 2022 Market Update
So far, February has seen a continuation of the challenges facing markets and the economy that we saw in January. Stock market volatility has continued as markets attempt to digest surging inflation, higher interest rates, and concerns of a Russian invasion of Ukraine. We will get into these issues in more detail and, of course, provide our views on them, but first, a bit of inflation humor.
Speaker Series Recap – Dr. Richard Wobbekind
Thank you to Dr. Richard Wobbekind from the University of Colorado Leeds School of Business for joining us for an informative presentation on local and national economic matters. For those of you who were able to join, we hope you found Dr. Wobbekind’s presentation insightful. If you missed the presentation, a replay is available. Click this link to register and watch.
Inflation, Interest Rates & the Federal Reserve
Just last week we got another monthly reading on inflation. The official CPI report showed inflation increased by 7.5% year-over-year and rose 0.6% from the previous month. While this number was largely expected, it marks two months in a row with annual CPI readings over 7%. Interest rates, as measured by U.S. Treasury bonds, have continued to climb, particularly short-term interest rates, which are now pricing in multiple rate increases by the Federal Reserve in 2022 and 2023. In fact, as of this writing, the 2-year U.S. Treasury yield has risen to just under 1.6%, up from nearly zero just six months ago. Longer dated interest rates have moved up as well, but not nearly as much as shorter maturities. The 10 and 30-year U.S. Treasury rates now stand at 1.98% and 2.29% respectively.
Our view – With the 2-year U.S. Treasury at nearly 1.6%, the bond market has already priced in six to seven quarter point interest rate increases over the next two years. This is slightly higher than the upper end of the guidance provided by the Federal Reserve. The Federal Reserve has indicated that they are likely to raise rates two to three times both this year and next. Barring something unexpected, the Federal Reserve will raise interest rates at their next meeting in March, and likely continue doing so methodically for the foreseeable future. While this move in rates has been swift and dramatic, the pain for bond markets may very well be behind us, as the next two years’ interest rate increases are already priced in. As Dr. Wobbekind stated on our call last week, he believes that we are now likely seeing “peak” inflation, and we agree with him. We anticipate that inflation will slow throughout the remainder of the year, settling in to a 3%-4% annualized rate by year end. We don’t expect to see prices going down substantially, if at all, but the pace of price increases is likely to moderate. The good news is that while inflation is running above trend, so too is growth. Full year GDP growth is forecasted to be in the 3.5% to 4% range. While this is lower than 2021 growth rates, it is still meaningful and significantly higher than recent years.
Russia & Geo-Political Fears
Russia has dominated the geo-political headlines over the past couple of weeks as fear of a major international conflict have grown. Russia has amassed significant forces along the Ukrainian border and rumors of an imminent invasion have rattled investors’ nerves and sent energy prices higher.
Our view – This is a complex situation with a lot of history and potential ramifications for the global community. We do not want to speculate as to how this will be resolved; however, we would tend to believe that the diplomatic path is preferable for all parties and is likely to prevail. That being said, in the event that diplomatic channels do not succeed, and an armed conflict ensues, we would expect to see a near-term pull back in markets coinciding with a move higher in energy prices. In the past, short military conflicts have driven market corrections, but the pullbacks have generally been short-lived and have provided opportunity for equity buyers.
In conclusion, we expect elevated volatility to continue as markets continue to digest hot inflation, interest rates, economic updates, and developments out of Eastern Europe. Our Investment Committee is watching and evaluating if the market may be pricing in a more aggressive rate path by the Federal Reserve than is likely to materialize. We will continue to keep you updated as the new information becomes available.
As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.