State of the Economy and Markets
Quarter 1, 2022
As we approach the end of the first quarter of 2022, the financial markets continue to assess the impact of the ongoing Russia-Ukraine war, increased inflation, and interest-rate hikes. Additionally, the markets are still working through the many challenges that the Covid pandemic thrust upon the world just over two years ago.
As a result, the S&P 500 Index experienced its first correction (a decline of 10% or greater) since the pandemic-driven drop in early 2020. As of March 28, 2022, the S&P 500 Index is down approximately 5% from year end-2021. The S&P 500 Index experiences a correction every 22 months or so, and, as of now, this one appears to be of the garden-variety type.
The pandemic has officially entered its third year, and many countries are once again reporting a surge in daily Covid cases. The World Health Organization has warned that the pandemic is far from over, and that fresh waves and new variants are likely. Here in the U.S., health officials are citing a rise in cases in Europe and cautioning those of us here stateside to remain diligent. On the economic front, the U.S. economy experienced real GDP growth of 5.5% for calendar year 2021, after contracting 2.3% following the Covid-induced recession of 2020.
What the overall outcome of Russia’s invasion of Ukraine will be on the global economy is yet to be determined, but the resulting spike in energy prices will likely lead to increased inflation and reduced economic growth—the impact of which will be much greater in Europe than here in the United States. The war has already resulted in an estimated 19,000 deaths and millions of Ukrainian citizens being displaced. The resistance from the Ukrainian people has been extraordinary and so too has the help from others around the globe.
Prices, as measured by the most recent Consumer Price Index in February, have increased 7.9% over the past 12 months. These higher prices are a result of several things, including supply chain disruptions and increased consumer demand following the reopening of the economy after the COVID-19 shutdown. Also contributing to the rise in prices is an increase in money supply from the many government stimulus programs (more than $7 trillion) enacted during the pandemic and a rapid rise in energy costs due in part to strong consumer demand, but more directly a result of the Russia-Ukraine war.
The Federal Reserve Board, among its many responsibilities, is tasked with keeping inflation in check. In what is now expected to be a series of rate hikes throughout 2022, the Fed raised rates at its March meeting for the first time in more than three years, increasing by 25 basis points (0.25%). It is now expected that the Fed will raise rates another 25 basis points at each of its remaining six meetings this year. Just recently, Federal Reserve Chair Jerome Powell said that rate increases will continue until inflation comes under control, and more aggressive moves will be made if deemed necessary.
The complexities the Fed faces in trying to combat an extended period of rising prices, while at the same time allowing the economy to continue to grow, are many. Just how well they manage a nearly $25 trillion economy during increasingly challenging times will likely tell the story of the stock market for the remainder of 2022 and into 2023. The consensus is that the U.S. economy will grow this year, and that, at some, point the broader domestic stock markets will rally from their current levels and end the year higher than where they started. Investors would be wise to avoid getting caught up in the daily news and/or market fluctuations and remain focused on the long-term benefits of owning stocks.
As always, your relationship team is here to meet with you in whichever way is most comfortable for you. We value your relationship and the confidence you have placed in Adirondack Wealth Management by choosing us as your financial partner.
Senior Vice President
Wealth Management Director