2022 has been tumultuous to say the least. The economy is dealing with aggressive Fed policy, Covid-19 lockdowns in China have contributed to ongoing supply-chain issues, and Russia’s invasion of Ukraine has significantly disrupted energy supplies and exacerbated overall inflationary pressures.
With such negativity at hand, it comes as no surprise that the markets in general have been volatile.
Corporate Growth and Earnings
- Corporate Earnings across the board have been resilient. However, earnings are looking less “hot,” with much more weakness across the board.
- Economic activity declined in Q1, largely due to declining exports, reduced imports, lower government spending. The chart below tells the story.
- Inventory declined as retailers came to grips with the fact they over-purchased inventory in late 2021. As a result, many retailers had an oversupply, drastically reducing new inventory purchases.
Corporate Earnings Remain Resilient
- While stock prices have declined in 2022, the outlook for future earnings remains positive across the board.
- Healthy job growth supports a positive outlook for the consumer.
- Corporate-earnings growth remains strong, with over 79% of S&P 500 companies reporting results thus far beating expectations.
Global Conflict and Concerns
There are various global concerns heavily weighing on the US economy, most notably:
- Ongoing Russian war in Ukraine
- Ongoing Covid-19 lockdowns in China’s largest cities.
These geopolitical factors, however temporary, have exacerbated inflationary pressures that are likely to persist for the foreseeable future and will be manifested in the form of:
- Higher oil prices
- Slower growth in Europe, thereby resulting in reduced demand for US exports
- A stronger US dollar makes US exports more expensive, although it serves to reduce the costs of imports
The good news is that the combined impact of these factors alone are unlikely to generate a strong recession in the US, even as economic growth stalls.
Inflation and Economic Policy
This week, US Inflation recorded a 40-year high and there are a myriad of reasons for persistently high prices, most notably:
- Supply chain issues
- Increased demand for goods, including new and used vehicles
- Production costs
- Major disruptions to the global energy market
- High Housing Costs
As a consequence, it appears certain the Fed may continue to raise rates in an attempt to cool inflation.
Real Estate and Mortgage Financing
Many potential home-buyers are feeling the impact of the recent increase in interest rates as the average 30-year mortgage rate rose significantly in Q1 and remained stubbornly high thus far in Q2. As a result, mortgage and refinancing applications have been down for the fourth consecutive week, while house prices still remain high, and supply of new homes remains low – all in the face of rising demand.
In Summary
The US economy is being impacted by many factors, but remains resilient as the impact of Covid-19 lessens. Our good friends on the Schwab research team predict the Fed may increase interest rates tactically, perhaps into September 2022, until inflation cools down.
This and other factors are likely to result in continuous bouts of market volatility and general economic anxiety. In the face of such short-term uncertainty, we strongly recommend investing with a long-term view in mind and rebalancing your portfolio according to your specific long-term goals and investment strategy.
To access a deeper dive economic analysis, click here to access Schwab’s market and economic insights.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.