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Key Points for the Week

  • Earnings are expected to grow 4.5% in the first quarter as companies face tougher year over year comparisons and a wider range of uncertainty.
  • The minutes from the most recent Federal Reserve meeting indicate a 0.5% increase in rates would likely have occurred if Russia hadn’t invaded Ukraine. Future hikes of 0.5% appear likely.
  • Used vehicle prices, which rocketed higher during the pandemic, declined for the second consecutive month.

The first quarter of 2022 was jam-packed with volatility-inducing events: rising inflation, war in Ukraine, rising interest rates, sanctions on Russia, and a new COVID-19 outbreak in China.

Here’s a brief review of what happened:

Inflation continued to rise. At the start of the year, consumers and investors were primarily concerned about inflation. In February, the Personal Consumption Expenditures Price Index showed core inflation, which excludes volatile food and energy prices, was up 5.4 percent year-over-year. That’s well above the Federal Reserve (Fed)’s two percent target for inflation.

The Fed began to tighten monetary policy late in 2021 by curtailing its bond-buying program. Investors expected the Fed to continue fighting inflation in 2022 by raising the federal funds target rate. Raising rates makes borrowing more expensive, which causes consumer and business spending to slow, demand for goods and services to drop, and prices to move lower, reported Carmen Reinicke of CNBC.

Russia invaded Ukraine and sanctions followed. In late February, Russia shocked the world by invading Ukraine. The war has devastated the people and the economy of Ukraine. The Kyiv School of Economics estimated that physical damage inflicted on Ukraine’s roads, bridges, rails, ports, residences, factories, airports, hospitals, and schools from February 24 to April 1 exceeded $68 billion, reported The Economist. As the human and economic costs of the war filtered through markets:

  • Energy prices continued to surge around the world: Oil prices finished the quarter 33 percent higher. One result was that energy and utility sectors delivered strong returns relative to other market sectors during the quarter, reported Lauren Solberg of Morningstar.

    Higher energy prices exacerbated global inflation. For example, rising fuel prices lifted other prices, too. The cost of diesel fuel, which is primarily used for trucking and shipping, rose 63 percent in the United States during the first quarter. Higher transportation and delivery costs were reflected in the cost of other goods, including food, reported Brian Swint of Barron’s.

  • Global food prices increased: Ukraine and Russia were key exporters of grains and cooking oils, as well as other products. Since February, when the war began, the price of wheat has increased by almost 20 percent, corn by 19 percent, barley by 27 percent, and vegetable oils by 23 percent, according to The Economist.

Central banks continued to tighten monetary policy. The war in Ukraine complicated the outlook for economic growth and inflation around the world. Despite uncertainty about growth, many central banks tightened monetary policy in an effort to bring inflation down.

In the U.S., the Fed raised the federal funds target rate by 0.25 percent in March. Fed officials expect to raise rates six more times in 2022 and begin reducing the Fed’s balance sheet, a process known as quantitative tightening, at its May meeting.

Yields on U.S. Treasury notes and bonds shifted higher during the quarter and into April. The yield on the 2-year Treasury note rose from 0.78 percent at the start of the year to 2.53 percent at the end of last week, while the benchmark 10-year Treasury yield rose from 1.63 percent to 2.72 percent. When bond yields rise, bond prices fall. In the first quarter, Morningstar indices for U.S. Treasuries, corporate, high-yield, and mortgage bonds all moved lower.

A new COVID-19 outbreak in China led to a lockdown in Shanghai. On March 28, Shanghai, China, a city of 25 million people, was locked down amid a new COVID-19 outbreak. A source cited by Reshma Kapadia of Barron’s stated:

…concern is growing about the scars it may leave on Chinese consumers—a crucial growth engine for the struggling economy but also for a host of global companies…Consumers will be more cautious this time around. Their pandemic savings are depleting, wealth has been destroyed in equities and property and wage growth has already turned down.’

Reshma Kapadia, Barron’s

The Shanghai Composite Index dropped by almost 10 percent during the quarter, reported Reuters.

Overall, stock markets declined during the first quarter of 2022. The MSCI All Country World Index (ACWI) measures the performance of mid-sized and large company stocks in 23 developed markets and 24 emerging markets. It reflects the performance of about 85 percent of the investable stocks across the world and finished the first quarter of 2022 down 5.36 percent.

The were some regions that delivered positive returns during the period. For example, markets in some commodity-exporting countries in Latin America, Africa, and the Middle East benefitted from the supply disruptions that followed Russia’s invasion of Ukraine.

This Week in the Markets

Corporate earnings comparisons are getting more difficult. FactSet reports first quarter S&P 500 earnings are expected to rise 4.5%. Earnings growth will likely increase during the quarter as companies deliberately push earnings estimates lower so they can produce positive surprises. Wherever the growth rate finishes, we expect it to be lower than last year. 2021 earnings benefited from catch-up spending from 2020 and heavy government stimulus.

The Federal Reserve released the minutes from its most recent meeting, in which it raised rates 0.25%. The Fed would likely have raised rates 0.5% if Russia’s invasion of Ukraine hadn’t introduced additional uncertainty into the economy. The minutes and subsequent communication have strengthened the likelihood of 0.5% rate hikes in the next two meetings. The Fed is also expected to begin to reduce its balance sheet of Treasury and mortgage debt.

One small piece of good news on the inflation front: Used car prices have declined the last two months. The price of used vehicles soared during the pandemic as public transportation became less common and people relocated to more car-intensive areas. Prices also increased because new car production was hampered by chip shortages.

The Consumer Price Index in the U.S. and China lead a large number of important data releases this week.

A Cure for Ice Cream Headaches

When the weather gets warmer, many people consume ice cream, slushies, and popsicles to cool down. Occasionally, that leads to brain freeze, reported Joseph Nordqvist in Medical News Today.

Brain freeze is the sharp, painful headache that occurs after you’ve eaten cold foods or drinks too quickly. When something extremely cold touches the roof of the mouth, the capillaries in the sinuses cool and blood vessels narrow. While many people press a palm to their foreheads when they experience brain freeze, that’s not a particularly effective cure. Better options may be to:

  • Drink warm water,
  • Press your tongue to the roof of your mouth to warm the area, or
  • Cover your mouth and nose with your hands and breathe so warm air flows over your palate.

Here’s something else to keep in mind: eating hot foods on hot days may cool the body effectively, so long as the foods make you sweat. Sweating helps lower body temperature.

Federal Reserve Policy

Last week, the Fed released the minutes from its most recent meeting on interest rates. The minutes and the public appearances we referenced last week have provided us further clarity on the picks the Federal Reserve is likely to make to get inflation under control.

The Fed has two primary mandates: pursue full employment and manage inflation. Setting policy in a pandemic has been very difficult. In response to the pandemic, the Fed cut interest rates to zero, provided support for multiple fixed-income asset classes, and expanded its balance sheet in order to make more funds available for lending. Taken as a whole, those responses were effective and helped cushion the damage the pandemic inflicted on the economy.

It has become more apparent the Fed should have started pulling away some support earlier. It just increased interest rates for the first time and didn’t stop expanding its balance sheet until late last year. The Fed would likely have raised rates 0.5% last meeting but refrained because of the uncertain economic impact coming from responses to Russia’s invasion of Ukraine.

As inflation keeps climbing higher, the Fed is about to accelerate the pace of tightening. The most likely outcome is for the Fed to increase interest rates 0.5% at each of the next two meetings. After that, the Fed is expected to still raise rates, but there is less clarity whether rates will go up by 0.25% or 0.5%.

The Fed will also start reducing the size of its balance sheet. Once the Fed had decided to reduce interest rates to near zero during the pandemic, it moved to purchasing bonds from the government or purchasing mortgages. The goal was to push interest rates lower across multiple maturities, increasing the willingness of banks to lend. The Fed purchased bonds of all maturities and is now seeking to reduce the size of its balance sheet.

It seems to have settled on reducing Treasury debt by $60 billion per month and government-backed mortgage debt by $35 billion per month. Most of the reductions will occur by not reinvesting interest payments or principal payments. If the payments fall short, the Fed will likely sell some short-term Treasury debt or mortgages to achieve its goal. The Fed is seeking to shrink its balance sheet much faster than in the last economic cycle.

IRS Issues Identity Theft Warning

The IRS is reminding taxpayers to be vigilant and watch out for IRS impersonation scams intended to trick them into providing their personal and financial information. Some of the schemes included text message, e-mail, and phone scams. The IRS also warns people to be aware of potential unemployment fraud.

Text Message Scams

If you receive an unsolicited text message claiming to be from the IRS or a program linked to the IRS, take a screenshot of the message and email it to with the below information:

  • Date/time/time zone the text message was received.
  • Phone number that received the text message.
  • Do not click on links or attachments from suspicious or unexpected messages.

E-mail Phishing Scams

Please be aware that the IRS does not contact taxpayers by email to request personal or financial information. Most of the time, the IRS will contact taxpayers through regular mail delivered by the United States Postal Service. Similar to a potential text message scam, report the email to by sending the suspicious email as an attachment.

Phone Scams

The IRS (and its authorized private collection agencies) will never:

  • Call requesting immediate payment using prepaid debit cards, gift cards, or wire transfer.
  • Threaten to arrest a taxpayer by bringing in law-enforcement or local police.
  • Demand taxes be paid without the opportunity to question or appeal the amount owed.
  • Ask for credit or debit card numbers over the phone

Unemployment Fraud

Organized crime rings have started using stolen identities to claim unemployment or other benefits for which the taxpayer never applied. Victims of unemployment identity theft may receive:

  • Mail from a government agency about an unemployment claim or payment they did not file.
  • An IRS Form 1099-G reflecting benefits that were not expected or received. The form itself may also be from a state for which the taxpayer did not file for benefits.

For information on necessary steps to take for suspected unemployment fraud, taxpayers can visit the U.S. Department of Labor’s fraud page here.

The IRS focuses on tax-related identity theft and suggested taxpayers take the below steps if they feel their Social Security number has been compromised:

  • Respond immediately to any IRS notice and call the number provided.
  • Complete IRS Form 14039 (Identity Theft affidavit).
  • Continue to pay their taxes and file their tax return, even if it must be done by paper.
  • For specialized assistance, call 1-800-908-4490.

If you have any questions about this information, please contact us.

Did you Know? This Week in History

April 11, 1814: Napoleon Abdicates the Throne and is Exiled to Elba

On April 11, 1814, Napoleon Bonaparte, emperor of France and one of the greatest military leaders in history, abdicated the throne, and, in the Treaty of Fontainebleau, was banished to the Mediterranean island of Elba.

The future emperor was born in Ajaccio, Corsica, on August 15, 1769. After attending military school, he fought during the French Revolution of 1789 and rapidly rose through the military ranks, leading French troops in a number of successful campaigns throughout Europe in the late 1700s. By 1799, he had established himself at the top of a military dictatorship. In 1804, he became emperor of France and continued to consolidate power through his military campaigns, so that by 1810 much of Europe came under his rule.

In 1812, thinking that Russia was plotting an alliance with England, Napoleon launched an invasion against the Russians that eventually ended with his troops retreating from Moscow and much of Europe uniting against him. In 1814, Napoleon’s broken forces gave up and Napoleon offered to step down in favor of his son. When this offer was rejected, he abdicated and was sent to Elba. In March 1815, he escaped his island exile and returned to Paris, where he regained supporters and reclaimed his emperor title, Napoleon I, in a period known as the Hundred Days. However, in June 1815, he was defeated at the bloody Battle of Waterloo. Napoleon’s defeat ultimately signaled the end of France’s domination of Europe. He abdicated for a second time and was exiled to the remote island of Saint Helena, in the southern Atlantic Ocean, where he lived out the rest of his days. He died at age 52 on May 5, 1821, possibly from stomach cancer, although some theories suggest he was poisoned.

Weekly Focus

Be positive. Be true. Be kind.

Roy T. Bennett, Author

The way I see it, if you want the rainbow, you gotta put up with the rain.

Dolly Parton, Singer