January 2022 Commentary
Good afternoon and happy Monday. I hope everyone in the Northeast is all shoveled out. It was a massive storm that dropped at least 2 feet on us in Taunton. At least the snow was light enough to move easily. We even cleared off Anna’s car with the leaf blower. The photo above is from the office. It isn't often you see the bay completely frozen over.
We have a unique day this week. In two days, it will be February, 2, 2022. Or Two. Two. Twenty-two. That means it’s Two’s-day, not Wednesday. Be ready.
This has been a difficult month in the stock market. Typically, this is a very good month in the markets. Wall Street seems excited about the prospect of a new year. We also begin to see the economic data regarding the previous holiday season trickle in as well. Spirits tend to be high overall.
We’ve seen something very different this year. All of the major stock indices approached or exceeded a correction some time in January. That is when the markets fall at least 10% from the previous high. Our last market high was in late December.
So What Is Wrong?
Let’s talk about the bad news. First on everyone’s mind is the Omicron variant. Covid cases hit all-time highs in late December into January. Shutdowns and slowdowns affected supply chains as well as employment numbers. First-time-claims for unemployment crept up throughout the month.
Inflation is also a big concern. We haven’t seen inflationary pressures of this nature in about 40 years.
What amazes me is that people - from the local Joe-on-the-street to experts on Wall Street and the government were all but convinced that we’d never see inflation again. Inflation happens. The reality is that we were lucky to avoid it for the last few economic cycles. But it is never really gone.
While many blame supply-chain issues for the inflation problem, the real culprit is the massive increase in government spending over the last 13 years. This isn’t just a pandemic issue. The federal government spent trillions during the last economic downturn in 2008/9. Since then, little has been done to reduce or eliminate the massive debt they accumulated.
The claim was that this was the “new economy” and that huge debt would not create inflation. That just isn’t so. It would be like always running red lights because “I haven’t gotten into an accident yet.” Sometimes the consequences of our actions take years to materialize.
In the last two years since Covid arrived, we’ve added even more trillions to the government debt. In addition, the Federal Reserve has ballooned their balance sheet to double its January 2020 size. (I’ll explain what that means in a minute.)
Our last bit of “bad” news is the prospect of rising interest rates. But despite all of the worry on Wall Street regarding interest rates, it is the first sign of light at the end of the tunnel.
Signs We Should Be Hopeful!
The Federal Reserve confirmed its plan to begin increasing interest rates, currently at or near zero, beginning in March. Chairman Powell finally sees that inflation is the biggest risk to this economy and that trumps the government’s desire to over-inflate a growing economy.
Mortgage rates jumped quickly around year-end in reaction to this news. They have fallen since then, but other interest rates have adjusted upwards, causing losses in most bond categories.
So how is this a glimmer of good news? As we’ve talked before, we need to normalize interest rates. The end result will be growth in our economy.
Businesses have not competed for capital for more than a decade. Due to low interest rates, investors have raced into stock investments searching for better returns.
Higher interest rates mean more alternatives for investors - they don’t have to invest in companies in order to earn a return. With more options available, corporations will be forced to compete for a relatively fixed pool of investment money.
The best way to compete is to innovate - to show you will earn more for investors. That leads to better products, economic growth and more jobs.
There is another exciting tidbit from the latest Federal Reserve meeting. Chairman Powell stressed that there needs to be a plan to reduce the Fed’s balance sheet. (See, I told you we’d talk about this.)
As I mentioned above, the Fed has purchased trillions in US bonds in the last 13 years. That's what they mean by the Fed's "balance sheet."
Why would the Fed buy bonds issued by the US government? Isn’t that just taking money from one pocket and putting it into another?
Yes! It is!
The reason the Fed has purchased bonds is to reinforce low interest rates. If the Fed is always willing to buy a Treasury Bond regardless of interest rate, everyone else is forced to buy at that rate.
The unintended consequence of this policy is you are effectively creating money out of thin air. In a normal economy, investors buy Treasury Bonds to invest in America.
When the Federal Reserve “buys” these bonds, it’s buying it with money that doesn't really exist. This is one way a government can literally print money.
So what’s the great news?
Chairman Powell stressed that the Fed is not only looking to curb inflation by raising interest rates, it is also looking at selling off the bonds it currently owns.
This will help temper inflation by removing that money it created from the economy. It will also provide the Fed space to use this tool in the future to combat a future recession.
There continues to be more good news out of the investment arena. Gross Domestic Product (GDP), or the sum total of all of the country’s goods and services, appears to have risen by over 6% in the fourth quarter, based on early estimates. That’s amazing news.
In addition, those first-time-claims for unemployment fell in the last week of January. This is likely a result of the reduction in Covid cases nationwide. Case counts, while still high, are down by 35% or more in the last few weeks. Cases in the Northeast, which was the hardest hit during the Christmas season, are down by two-thirds or more. (Source: Worldometers.com)
Finally, we’re seeing the first of the fourth-quarter earnings reports from major corporations. While profits aren’t growing as fast as investors would like (due to inflationary pressures), sales are up virtually across the board.
What do we expect as we move forward?
- January account statements will show losses. Be prepared now. Overall, it was a bad month in the stock market.
- Economic growth continues to be strong. With Covid cases falling, that will only increase. Anticipate continued economic good news in February.
- Interest rates will rise. This may mean some losses in bond categories but will provide an opportunity to lock in higher rates as we move through 2022.
Overall, I continue to be bullish about the economy. We are seeing some labor tightening and we are likely to feel inflationary effects for some time to come. Yet growth appears to be robust and consumers are not deterred in their spending.
That is all for today. Stay safe out there. Not just with Covid but with our winter weather. The great news is that we’ve added a whole hour of daylight since December 21 and we will add another in the next four weeks. It won’t be long until we see green again.
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This blog is the opinion of Successful Money Strategies, Inc. and is provided for informational purposes only and is not intended to provide any investment advice or service. Statistics and other figures are accurate at the time of original publishing. Any advice herein should not be acted upon without obtaining specific advice from a licensed professional regarding the readers own situation or concerns. Always count your change