Market Overview
It has been a rough and tumble start to the year for both stock and bond markets, domestically and internationally. Concerns over rising inflation and the Russian invasion of Ukraine sent energy prices higher, interest rates higher and stock and bond prices lower through early March. While we have seen some small signs of bounceback in the last few weeks, net figures year to date are negative generally across the board. US Large and Small cap stocks are both down single digits, alongside international stocks. Bonds are also off as longer term rates jumped. It’s worth noting that in general growth stocks have been hit much harder than value stocks, especially in the small cap space where value stocks are nearly breakeven for the year and growth is down double digits, a reversal of a years-long trend of growth outperformance.
After a very significant run in the markets coming out of the initial COVID lockdowns, we have simply given back some of the recent gains. Many stocks are now back within striking distance of all time highs already. Being fearful during downturns can lead to ruin, and believing that this downturn will somehow end differently than every one before is a good path to disastrous portfolio outcomes.
| 4Q 2021 | 1 Year | 3 Year | 5 Year | |
| Large Cap US Stocks | -4.60% | 15.65% | 18.92% | 15.99% |
| Small Cap US Stocks | -7.53% | -5.79% | 11.74% | 9.74% |
| International Equity | -5.91% | 1.16% | 7.78% | 6.72% |
| EM Equity | -6.97% | -11.37% | 4.94% | 5.98% |
| Aggregate Bonds | -5.93% | -4.15% | 1.69% | 2.14% |
Index performance is provided as a benchmark. It is not illustrative of any particular investment. An investment cannot be made in an index. Past performance is not an indication of future of results. S&P 500, Russell 2000 Index, MSCI EAFE Index, MSCI EM Index, BBgBarc US Agg Bond Index. Returns as of 3/31/2021.
Economic Update
General economic trends remain largely in place from recent quarters. Inflation has not let up, labor markets are tight and real estate values are skyrocketing.
This week we learned that fourth quarter 2021 GDP was revised slightly downward to 6.9%, still an excellent figure for economic growth. Expectations for first quarter 2022 GDP are down considerably, around 1% for consensus estimates.
Inflationary pressures remain ongoing, with the most recent figures from February 2022 at a 7.9% increase in CPI over a year prior. While prices are increasing across the board, energy costs have been a major contributing factor both to headline CPI and to wholesale prices, which are affected by energy costs in both production and shipping.
Energy prices had been on the rise since late last year, and the invasion of Ukraine caused further spikes. While WTI crude prices may have temporarily peaked in early March, prices remain very high compared to a year ago.
Of course, higher oil prices have translated to higher unleaded fuel costs and consumers are facing some sticker shock as national average fuel costs have jumped to over $4 per gallon in the US.
In the face of ongoing inflation, the Federal Reserve has sent clear signals that they will maintain the intention to raise short term rates, the first of which occurred in March by 0.25%. Consensus estimates are to expect several more rate increases throughout this year as the Fed attempts to exert some control over rising prices.
Real estate’s seemingly relentless value increases continued in the early part of the year. Through January, national home prices increased 19.2% from a year ago. Pandemic buying and the lack of inventory continued to drive prices higher and higher.
That said, we can see early signs of softening today. A jump in long term interest rates moved mortgage rates quickly higher, and mortgage applications have slowed. It is reasonable to expect that higher mortgage costs could cause a slow down in price increases as total monthly payments move higher.
Despite rising prices, overall data for households and consumers is positive. The labor market is still extremely tight, as total payrolls increased 678,000 in February and the unemployment rate moved down again to 3.8%.
Job openings remain extremely high as employers struggle to find workers in the current marketplace. Current openings are 11.2 million, near record levels.
Consumers are clearly comfortable and confident in their spending, as retail sales jumped 15.9% in February from a year ago.
Household net worth, boosted by rising real estate and stock market prices, adds to consumer confidence as balance sheets bloom. Net worth increased 14.4% from a year ago in the fourth quarter of last year.
Tax & Policy Updates
After the unexpected demise of the Build Back Better bill in Congress at the end of 2021, we’re starting to see some matters of discussion including the return of the “Secure 2.0” retirement legislation. This week, the House passed a version of this bill that would implement a number of changes for retirement savers, including but not limited to:
- Increasing the Required Minimum Distribution age from 72 to 75 over time (by 2033);
- Requiring automatic enrollment in newly offered workplace 401(k) plans;
- Increases “Catch-Up” contributions to 401(k) plans for older workers;
- Enables employers to make matching 401(k) contributions to employees based on student loan payments;
- Expand Roth contribution options to include employer-made Roth contributions (that would be subject to income tax at the time of contribution) as well as SIMPLE-IRA Roth contributions.
This bill passed the house with overwhelming support, making passage for a similar piece of legislation through the Senate somewhat likely (although we’ve thought that before!).
Lastly, this week President Biden released his proposed budget for the coming year. This included a theoretical tax on unrealized gains for filers with net worth over $100M, as well as increasing the top marginal rate back to 39.6% and corporate rates back to 28%. That said, only Congress can write and pass laws and I feel it is unlikely we will see all of these items come to pass.
Bason Asset Management 