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February 2022 Market Update


2022 FEB Market Update
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FEBRUARY 2022 COMMENTARY

Christopher Gerber, CFA

The news coming out of Ukraine has added volatility and put pressure on asset prices globally, however the expected impact is minimal overall, and isolated to regions of conflict, with a minimal expected impact to investors.



Growth

Economic growth is expanding. In 2021 the U.S> economy grew overall at 5.7%. This is a 37-year high, one-year growth rate. It is important to understand the context, however. We are recovering from decreased growth during the virus. Here is a good perspective:


· 2020 GDP growth rate: -3.4%

· 2021 GDP growth rate: +5.7%


The annual two-year net growth rate from these numbers is 2.1% (1) . This is below the 2019 growth rate of 2.3% and below the 2018 growth rate of 2.9%. In fact, the 2018 growth rate is about 38% higher than the two-year average (2).


Jobs

January U.S. nonfarm payrolls rose by almost 275% above expectations. Revisions to previous payroll gain reports were positive with momentum going into 2022. Wage growth was +5.7% in 2022.


Profits

The 4Q21 earnings season has been solid, with 93% of companies reporting. 76% have beaten earnings expectations and 70% have beaten revenue expectations. JP Morgan Asset Management estimates show a 42% increase in earnings per share growth over the previous year. This is despite all the bad economic news. Earnings typically don’t go away like turning off a light switch. It’s a reasonable assumption to assume that earnings will likely remain moderately strong going forward.


Inflation

Note that inflation is both a function of supply chain (demand outpacing supply), and an oversupply of money (excess capital in the marketplace). Inflation increases are expected for at least another quarter (through 06/30/22). The Consumer Price Index is up 7.5% year-over-year in the January report. This could moderate as supply chain issues recede. However, with the war overseas, there could be more supply chain issues in the near term, although the market appears to still be digesting that possibility. When Fed increases the money supply (M2) by 40% over two years without a plan to reduce it, rising inflation is inevitable. At this point expect to live with it for some period of time. No one knows exactly how long.


Interest Rates

The purpose of raising interest rates is to increase the cost of capital (i.e., borrowing costs), thus slowing spending. Borrowing costs are rising substantially already which may supply some amount of self-medication to the system. However, at times it needs extra help from the outside. Many Central Banks have signaled expected increases to short-term interest rates this year. In the U.S. Quantitative Tapering has also begun, supporting a rise in long-term interest rates domestically.


Investment Themes

Energy. The world is now reconsidering its flash change to renewable energy. Effective renewable energy is decades away. Fossil fuels are still needed to improve lives. OPEC recently released a report indicating that even with very aggressive assumptions for renewable energy, the world will still use more oil in 40 years than now. Even electric cars may not help as much as anticipated. Charging batteries still uses fossil fuels. After the war fossil fuels may not be punished as much as they are currently. If this is the case, energy becomes a positive investment theme.


Corporate Earnings

Since earnings typically do not simply vanish, it may be reasonable to expect 10 to 15% earnings increases in the S&P 500 and other major global stock indices during 2022. This could be a very bright light in a world that is in the midst of war, inflation, and increased political unrest.


Planning Tip

Alternative sources of income, especially for retirees, is an important theme going forward. Low interest rates make providing income from financial vehicles less efficient going forward.


To discuss your situation or learn more about FIDERE, please connect with us anytime at: www.fidereadvisors.com, call (833) 234-3373, or schedule a web meeting at: www.calendly.com/chris-gerber. To view aggregate portfolio models, visit: www.fidereadvice.com/models.



THE RISK MANAGER consolidates current information into actionable content designed to help investors navigate risks in the current economic and market environment – from a conservative view. The larger purpose of this work is to optimize financial plans and bring the reader closer reaching long-term life goals.



References

https://www.reuters.com/business/futures-gain-unitedhealth-bofa-rise-results-2022-01-19/

https://markets.businessinsider.com/indices

https://www.bloomberg.com/news/articles/2022-01-05/for-fed-taper-rates-then-quantitative-tightening-quicktake?sref=t1t0Cbcf


(1) 2.1% = ((1 - .034) x (1+ .057))

(2) ( 2.9/2.1 – 1) = 38%



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Not an offer to transact any securities, and not a financial planning engagement.


Advisory Services through Fidere Advisors, LLC. (dba FIDERE), a Registered Investment Advisor. Information provided has been prepared from sources believed to be reliable but is not guaranteed and does not represent all available data necessary for making financial decisions and is for informational purposes only. FIDERE and its representatives do not offer tax or legal advice through FIDERE. Please consult the appropriate advisor.








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