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Key Points for the Week

  • Stocks and bonds struggled last week as comments by Federal Reserve Chair Jerome Powell increased the perception that there will be a 0.5% rate increase.
  • U.S. industrial production grew 0.9% last month with auto production and energy drilling leading the growth.
  • Global inflation trends are starting to match U.S. trends as energy prices push global inflation higher.

“In the past week, Fed officials stepped up their rhetorical anti-inflation campaign, with Jerome Powell all but promising a half-point increase in the federal-funds target range at the next Federal Open Market Committee meeting, on May 3-4. And other Fed district presidents raised the possibility of more forceful action, including rate hikes of as much as three-quarters of a percentage point, something the Fed hasn’t done since 1994.”

The Fed’s goal is to slow high inflation, which has been exacerbated by the war in Ukraine and China’s coronavirus lockdowns, without pushing the American economy into a recession. The question is whether the economy is strong enough to continue to grow as the Fed tightens monetary policy. Economists’ opinions about that vary.

One participant in Barron’s Big Money Poll, which surveys institutional investors across the U.S., wrote: “It’s not as bad as people think…Yes, interest rates will rise, but earnings will also rise along with that. Profit margins continue to be very high, and employment is strong. It’s growth slowing down, not ending.

One participant in Barron’s Big Money Poll

Another participant disagreed, reported Nicholas Jasinski of Barron’s:

[The Fed] should have started the process of raising rates sooner so they could be more patient with the pace of increases…Now, they are going to be overly aggressive trying to play catch-up, and will probably go too far and slow demand down too much.

Nicholas Jasinski, Barron’s

Last week, major U.S. stock indices declined, reported William Watts and Barbara Kollmeyer of MarketWatch, and the real yield* for 10-year U.S. Treasuries was briefly in positive territory for the first time since the pandemic began in 2020, reported Jacob Sonenshine of Barron’s.

*When the term “real” is used with interest rates, it means the interest rate has been adjusted for inflation (the bond yield minus inflation). So, the real return is what investors would have after inflation.

This Week in the Markets

Markets reflected the jittery disposition of investors. The rapid move in interest rates and persistent inflation have unnerved some investors and contributed to higher volatility. Volatility has risen in most asset classes, but bond investors have experienced the biggest swings. 2022 is tied with 1994 for the second largest decline in the last 29 years. And 2022 has more than seven months to go!

CTN 04-25-22 Image 1

The latest volatility seemed to stem from a realization that the Fed is serious about raising rates by 0.5% rather than the normal 0.25%. Fed speakers have been telegraphing a 0.5% rate hike for several weeks. It appears the market reaction is reflecting concern future rate hikes may be even more rapid.

Inflation continues to be a problem outside the U.S. European inflation rose 2.4% last month. Russia’s invasion of Ukraine pushed energy prices higher and caused headline inflation to spike. Core inflation was still very high but rose 1.2% last month. Canada experienced similar trends, as energy prices contributed to a monthly increase of 1.4%. Canada’s central bank increased interest rates 0.5% to help combat elevated inflation. In Japan and Germany, producer prices are the biggest challenge, and they are likely to be partially passed on to consumers. The reelection of French President Emmanuel Macron should be a positive for markets as his opponent’s economic positions carried increased risk.

Stocks reacted negatively to the various releases last week, particularly Powell’s comments. The S&P 500 and global MSCI ACWI both dropped, and the Bloomberg U.S. Aggregate Bond Index declined as concerns about higher rates pushed bond prices lower. U.S. GDP leads a list of important economic releases this week.

Bond Volatility

2022 may end up being the most volatile year for bonds in many decades. The Bloomberg U.S. Aggregate Bond Index has fallen more than 0.5% a total of 16 times this year. The index of investment-grade U.S. bonds is down 9.5% so far this year. The more frequent declines in the bond market have made it most difficult for conservative investors. The S&P 500 has fallen 10% this year. Equity corrections aren’t so surprising, but a near correction in less volatile bonds is more surprising.

1994 and 2008 are the only competition for 2022 when analyzing bond volatility. The chart above was stretched back to 1994 because the Fed increased rates six times that year by a total of 2.5%. A final 0.5% increase in early 1995 was the last time the Fed raised rates by more than 0.25% in a single meeting. 2008 was volatile for different reasons as rates were cut rapidly. Investors were very concerned about corporate and mortgage defaults and bond prices frequently fell in response.

Inflation and interest rates are the source of the volatility in 2022. As nearly everyone is aware, prices for many goods have spiked in recent months. The Consumer Price Index (CPI) rose 8.5% in the last 12 months and is magnitudes above the Fed’s 2% target. Even core inflation, which excludes the effects of rapidly rising energy prices, has increased 6.5% in the last year.

In response to rapid inflation the Fed has indicated it will accelerate the rate of interest rate hikes. When rates move higher, borrowing becomes more expensive and some debt-financed projects are reduced or cancelled because of the higher costs. Those cancelled projects help to slow economic growth to levels the economy can sustain, reducing inflation.

The Fed is unwinding its rapid reduction of rates in 2020 in response to COVID-19. Rates were reduced by 0.5% on March 3 and by a full 1% on March 16 of that year. When faced with economic shocks the Fed often acts quickly to make borrowing less expensive and allow companies to stay in business. The Fed’s rapid response was generally viewed as successful in helping to reduce the economic damage from the pandemic.

While the Fed will take drastic action to cut rates, it generally unwinds those steps much more slowly by raising rates 0.25% at a time and typically every three months. In retrospect, the Fed should have started inching rates earlier than the 0.25% rate hike on March 17, 2022. Low rates and prolonged fiscal support contributed to a strong recovery while supply chain snags and people leaving the workforce reduced capacity. Higher inflation was the result.

This week’s selloff in bonds is a little perplexing because Powell’s indication that a 0.5% hike is likely was already reflected in expectations and had been widely signaled by Powell and other Fed officials. Jittery markets are prone to react, and the initial market reaction to Powell’s comments was to expect an even larger rate hike than he had suggested.

What happens next will largely depend on how sensitive the economy is to rate hikes. It will also be influenced by the pandemic and how countries trade off spikes in coronavirus cases with the loss of economic production. Some forecasters are expecting the Fed to raise rates extremely quickly and push the economy into recession. Our view is the Fed will take a more measured pace but raise rates by 0.5% the next two meetings to accelerate the move toward a more neutral posture.

For investors, this is a tough environment, and there is a tendency to treat bond declines like stocks, where the slides reflect potential risk of a major business failure. With bonds, that can be part of the risk, but the bigger risk in today’s environment is high inflation and competition against new bonds with similar maturities and higher yields. If new bonds maturing in seven years pay 3%, existing bonds maturing around the same time need to provide a similar return. If an existing bond pays less interest than newly issued bonds, then the price of the existing bonds must drop to provide a similar yield to the new bonds.

Because bonds mature, unlike stocks, there is also some good news in this move to higher rates. As bonds in your portfolio mature, whether held directly or in a fund, that money may be reinvested in new bonds that pay a higher yield. For some investors, the move toward higher rates may be good news as it signals the artificially low rates associated with the pandemic are over and bond portfolios may provide more yield compared to recent years. While painful in the short term, the move way from ultra-low rates may help investors with longer time horizons.

Stock Markets Aren’t The Only Thing That’s Been Volatile

Consumer sentiment has been bouncing around, too. The preliminary results for the April University of Michigan Survey of Consumer Sentiment showed that sentiment jumped 10 percent from March to April, primarily because consumers are feeling more optimistic about the future.

However, the Consumer Sentiment Index is down 25 percent from April of last year. It’s a remarkable change when you consider what has happened in the economy over the last 12 months. For example:

  • More people are working. The unemployment rate was 3.6 percent in March, down from 6.0 percent in March of last year, according to the Bureau of Labor Statistics.
  • Fewer people are filing for unemployment. Last week, we learned the 4-week average of unemployment claims was 177,250, down from 610,000 in 2021, according to the Department of Labor.
  • The economy continues to grow. The Manufacturing PMI®, which measures growth in the manufacturing sector, was 57.1 percent in March, the 20th consecutive month of economic expansion. That’s a slower pace of growth than last year’s 64.7 percent. However, readings above 50 percent mean the economy is growing.
  • Wages are higher. Average hourly earnings have risen 5.6 percent over the last 12 months, according to the March unemployment report. While the increase has not outpaced inflation in all industries, it has in some. The year-over-year growth rate in hourly earnings was 6.5 percent for retail trades, 6.6 percent in professional and business services, 7.9 percent in transportation and warehousing, and 11.8 percent in leisure and hospitality, reported Andrew Keshner of MarketWatch.
  • Inflation is higher, too. As we’ve mentioned before, there are a lot of different ways to measure inflation. No matter which way you look at it, inflation is significantly higher than it was last year. The headline Consumer Price Index showed prices were up 8.5 percent in March, while core inflation (excluding food and energy prices) was 6.5 percent.
  • Company earnings are strong. Despite inflation and geopolitical turmoil, companies were profitable during the first quarter of 2022. With 20 percent of companies in the Standard & Poor’s 500 Index reporting on earnings so far, 79 percent have reported better-than-expected earnings, reported John Butters of FactSet.

It’s interesting to note that recent surveys have identified a disconnect between the strength of the economy and Americans’ beliefs about the economy. A February 2022 survey conducted by Navigator Research found that 35 percent of Americans thought the economy was experiencing greater job losses than usual. A February 2022 Gallup Poll found that 42 percent of those surveyed thought the economy was performing poorly.

Nobel Prize-winning economist Robert Shiller has written that strong narratives – true or false stories that catch on with the public – influence people’s thinking and decision-making around markets and the economy. The gap between Americans’ perceptions that the economy has performed poorly and is losing jobs and the reality, which is that we’ve experienced a period of strong jobs growth and economic expansion, provide food for thought.

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 29, 1929: Cleveland Becomes First MLB Team to Play with Numbers on Back of Jerseys

On April 29, 1929, the Cleveland Indians opened the season with numbers on the back of each player’s jersey, the first Major League Baseball team to do so. The numbers would make it easier for scorekeepers, broadcasters and fans to identify players.

The New York Yankees, who had won the World Series in 1927 and 1928, were supposed to debut jersey numbers the same day, but their opener was rained out. Thus, fans waited another day to see two of baseball’s greatest players, Babe Ruth and Lou Gehrig, to sport jersey numbers 3 and 4, which would become famous. Those numbers corresponded with the sluggers' spots in the batting order.

Cleveland, which changed its name to Guardians in 2021, experimented with numbers on the sleeves of jerseys for a few weeks in 1916.

In 1923, the St. Louis Cardinals also tried sleeve numbers, but found the practice had a negative impact on team morale. "Because of the continuing embarrassment to the players, the numbers were removed," manager Branch Rickey said.

By the 1937 season, every MLB team had numbers on the backs of jerseys. In 1960, the White Sox were the first team to put names on the back of their jerseys. The Yankees remain the only team without names on the back of jerseys.

Weekly Focus

We are all storytellers. We all live in a network of stories. There isn’t a stronger connection between people than storytelling.

Jimmy Neil Smith, Founder, International Storytelling Center

Don’t be afraid to give up the good to go for the great.

John D. Rockefeller, Business Magnate