March is basketball overdose month for me. I love watching both the men’s and women’s NCAA basketball tournaments. The games are generally competitive and downright close contests. There are upsets and overtimes. The play is generally excellent and unpredictable. It’s three weekends of craziness.
The financial markets have sort of had their own form of madness, not only in March but January and February too! We’ve seen big swings in the markets from day to day and even during each day. Investors don’t seem to have much conviction or idea of what the future holds for the economy or the geopolitical outlook.
Late last year the Fed was hinting at raising interest rates three maybe four times in 2022 to combat inflation. Inflation numbers came in worse than the Fed expected the first two months of 2022. The worst in 42 years. Inflation is a silent thief, robbing all of us of purchasing power. As prices go up, people can afford less (unless wages are rising as fast as inflation…which they aren’t). As we buy less, less needs to be produced and we have a slowing economy. And to add another edge to that sword, to lower inflation, the Fed has to raise interest rates, which makes borrowing money more expensive, which also means we spend less. To get inflation under control, you must slow the economy. The big question for investors is if the Fed can successfully slow the economy without sending us into a recession. After their March meeting, at which time the Fed did raise rates by .25%, they hinted at not just another two or three more increases, but possibly as many as five more rate increases. If they bump them .25% each time, then interest rates will be 1.5% higher by year end. That will easily push mortgage rates above the 5% level, which in this writer’s opinion will have a dramatic impact on the housing market. It will slow the economy.
Then there is Russia. And let’s throw China into the mix, just because we don’t have enough to think about. The sanctions on Russian energy products is having some impact on gas prices here, but gas prices were rising before Russia invaded Ukraine, mostly due to reduced production here in the States as well as increased demand as we come out of COVID induced isolation. Historically, war has little long term impact on financial markets, so we have likely already seen that impact and the events in Ukraine, as horrific as they are, are in investors rear view mirror. Obviously, that can change quickly if Russia introduces their “battlefield” nuclear weapons or if they decide to keep moving into NATO countries. China may decide to provide some type of support to Russia or decide to grab Taiwan. In either of those cases, it’s likely that the US would impose some type of sanctions on China. Economic sanctions against China would have a much greater impact on the U.S. economy than sanctions on Russia. You think there are supply chain problems now, see what economic sanctions against China does.
I don’t want to totally come across as a “Danny Downer”, so I want to point out that we have faced these types of problems before. While my children haven’t experienced inflation like this, Deb and I have. Many of you have too, in the late 1970’s and early 1980’s. We remember waiting in gas lines to fill up our car and prices escalating at 15% a year or better. Mortgage rates at 13% for a 30 year fixed rate loan. We were still in the middle of the Cold War with strained relations with Russia. Things got worked out and I think things will get worked out again this time.
March Madness in the college basketball world will end the first week in April with a men’s and women’s champion crowned. I’m thinking that the market madness is going to continue beyond then and maybe well into the rest of the year. But at some point, inflation will begin to cool, and hopefully cooler heads will begin to prevail on the geopolitical scene too. The world is too interdependent now not to get it worked out.
“Our most common link is that we all inhabit this planet. We all breathe the same air. We all cherish our children’s future. And we are all mortal.”
-John F Kennedy
These are the opinions of Legacy Wealth Management, LLC and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice. Copyright ©2022 Mike Berry. All Rights reserved. Commercial copying, duplication or reproduction is prohibited.