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03/30/22

Sightline Weekly Market Update: Fed Policy Uncertainty Lingers

North American equity markets advanced for a second week, with technology stocks driving the Nasdaq higher by over 2%, followed by the larger-cap S&P 500 gaining 1.82%. The TSX gained 0.71%, with the price of oil jumping 9.3% in the week, as well as price pressure of other commodities. The S&P 400 Mid-Cap Index gained 0.24%, whereas Russell’s smaller-cap lost 0.39% on the week. Investors faced a continuous barrage of unsettling news on developments between Russia and Ukraine, topped by worrisome comments from Fed officials on how to control inflation and the resulting impact of policy decisions. In Europe, the major equity markets were mixed. The pan-European STOXX Europe 600 Index finished 0.23% lower, the German Dax fell 0.74%, France’s CAC 40 Index lost 1.01%, while Italy’s FTSE MIB Index gained 1.39%, and the UK’s FTSE 100 Index advanced 1.06%. Concerns over Russia and Ukraine and the prospect of tighter monetary policy plague European investors for another week. Language from the western leaders leaves little doubt that the crisis will not be settled any time soon, causing more angst among investors and the general population.

Several Federal Reserve presidents from various regions said they expect the benchmark funds policy rate to move to 2.4% to as high as 3.00% sometime in 2023. Several were not opposed to front-end loading the rate increases, providing the data warranted such a move. The uncertainty of Fed policy, inflationary pressures and the Russian/Ukraine conflict will be the backdrop for the foreseeable future.1, 2, 3, 4

In other economic news, the US Census Bureau and the US Department of Housing and Urban Development jointly announced US homes sales decreased 2% in February to an annual rate of 772,000 compared to January’s rate of 788,000. A year earlier, the rate was 805,000. The average sales price was $511,000. Inventory levels rose in February to a 6.3-month supply, the highest level since 2008.5 Then, on Friday, the National Association of Realtors released pending home sales data for existing homes, reflecting a drop of 4.1% in February. This is the lowest level in almost two years. Except for the Northeast, all four regions declined.6

On Thursday, the US Department of Labor released initial claims for March 19, reporting the lowest level since September 6, 1969. Weekly claims fell to 187,000, a decrease of 28,000 from the previous week. Continuing claims for all benefits fell 110,749 to 1,857,797 compared to the same week last year of 19,893,719.7 Also on Thursday, durable goods orders fell 2.2% in February, the first decline in five months. A survey by the Wall Street Journal of economists predicted a decline of 1%. The core orders, considered a more accurate measure of demand stripping out transportation and military, slid 0.3% in the month.8

The final March University of Michigan Consumer Sentiment indicator was reported on Friday, coming in at 59.4. With the inflation rate in the year ahead expected to be in the neighborhood of 5.4%, the highest reading since November of 1981, 32% of consumers feel their financial position will worsen over the next year, and half expect declines in inflation-adjusted income in the year ahead.9

For investors, the road ahead will be rocky. Commodities, particularly oil and food, will keep upward pressure on inflation, while Central Bank policies attempt to rein in spending. Shortages in oil due to carbon-neutral policies and the conflict with Russia will continue to keep oil prices elevated. Weather will play a key role in food shortages and the removal of grain shipments from Ukraine and Russia. As mentioned before, the bifurcation of the world economy will take some adjustment. It will undoubtedly harm the standard of living for most worldwide consumers. The Biden administration’s recent off-script suggestion of the need for regime change in Russia faced criticism both at home and abroad with many fearing an escalation of the conflict. We are entering a new world order unlike what we are leaving behind. Volatility will be here to stay until there is a resolution to the geopolitical crisis.

 

Sources: 

1 https://www.marketwatch.com/story/feds-bostic-says-goal-is-to-get-policy-rate-up-to-neutral-11647867288?mod=economy-politics

2 https://www.marketwatch.com/story/jerome-powell-says-fed-policy-can-lower-inflation-without-causing-a-recession-11647880352?mod=economy-politics

3 https://www.marketwatch.com/story/feds-daly-backs-marching-interest-rates-up-to-a-neutral-rate-and-maybe-higher-11647975775?mod=federal-reserve

4 https://www.marketwatch.com/story/feds-mester-wants-to-get-policy-rate-up-to-2-5-this-year-11647987778?mod=federal-reserve

5 https://www.census.gov/construction/nrs/pdf/newressales.pdf

6 https://www.nar.realtor/research-and-statistics/housing-statistics/pending-home-sales

7 https://www.dol.gov/ui/data.pdf

8 https://www.marketwatch.com/story/u-s-durable-goods-orders-sink-2-2-and-break-winning-streak-11648125604?mod=economy-politics

9 http://www.sca.isr.umich.edu/

 

 

Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors primarily through fee-based accounts.

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The opinions and information contained in this article are those of Sightline Wealth Management (“Sightline”) as of the date of this article and are subject to change without notice. Sightline endeavors to ensure that the content has been compiled from sources that we believe to be reliable. The information is not meant to be used as the primary basis of investment decisions and should not be constructed as advice. Each investor should obtain independent advice before making any investment decisions.

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