Back to All Posts

11 minutes

Key Points for the Week

  • Market volatility persisted, as heightened tensions with Russia added concerns to already rattled markets.
  • U.S. retail sales rebounded after a December drop, posting a 3.8% spike, which was above expectations. Inflation was only partially responsible as consumers spent heavily on goods.
  • Online and auto sales were strong, with their January year-over-year numbers hitting 8.4% and 13.7%, respectively. Both categories are above their pre-crisis trends.

Investors’ appetite for risk diminished as the Russian threat to Ukraine intensified.

Volatility was high last week as investors guessed and second-guessed how markets would react if Russia invaded Ukraine and sanctions were imposed on Russia. They also wondered what would happen if Russia pulled back. The questions are difficult to answer. Adam Samson, Valentina Romei and Matthew Rocco of Financial Times reported:

Economists can at least attempt to predict the outcome of central bank decisions by building models based on data, commentary from officials and historical precedent. But the outcome of the stand-off between Russia and the west is a type of so-called tail risk that could have major implications for the global economy, yet cannot be easily or accurately modelled. The sense of uncertainty has begun creeping into financial markets.

Adam Samson, Valentina Romei, and Matthew Rocco, Financial Times

Heightened geopolitical tension wasn’t the only concern for investors. They also contemplated whether the Federal Reserve (Fed) can tame inflation without hurting economic growth. The Fed is expected to continue to tighten monetary policy by raising the Fed funds rate in March, and reducing its balance sheet throughout 2022, reported Davide Barbuscia of Reuters.

Uncertainty about how markets would react if Russia invaded Ukraine caused some investors to favor safe-haven investments. As a result, last week:

  • Treasury rates moved lower. Normally, a pending Fed rate increase would push interest rates higher. Last week, however, the yield on benchmark 10-year Treasury notes dropped below 2 percent as investors sought safe havens.
  • Gold prices moved higher. “After surging in 2020, [the price of gold] has essentially traded sideways for the past 18 months... Now it’s on the move…Gold is often thought of as protection against inflation, but it’s really protection against chaos—and the situation in Ukraine certainly counts as chaos. That has helped push the price of gold up 5.8% in February,” reported Ben Levisohn of Barron’s.

Major U.S. stock indices moved lower last week and came close to correction territory, reported Barron’s. Corrections occur when assets, indexes, or markets decline by 10 to 20 percent. When the market corrects it is not a pleasant experience, but corrections are not unusual. It’s likely markets will remain bumpy in the coming weeks.

This Week in the Markets

Market uncertainty on multiple fronts is making it tough for investors. Russia’s ambitions in Ukraine, inflation, and some upheaval in individual securities are making it more challenging to bear risk than last year. 2021 was relatively calm, with only 80% as many 1% daily moves in the market as normal, and many of those were upswings.

With all the angst about key issues, the economy remains relatively strong. Retail sales jumped 3.8% last month and were 3.1% higher after inflation. Consumers continue to spend, particularly online and for new cars. The retail data reflects the now-regular theme that when COVID cases rise, so do online sales and the demand for autos, which has likely been intensified by the chip shortage.

The pent-up demand for goods continues to contribute to higher prices at the producer level. Producer prices rose 1% last month, indicating pricing pressures remain strong and will likely get passed on to consumers for many goods. The expectation the Federal Reserve will increase interest rates and reduce its balance sheet has pushed mortgage rates to their highest levels since early 2019.

The S&P 500 and MSCI ACWI declined last week as the fallout from any sanctions against or by Russia would likely hurt European economies more than the U.S. The Bloomberg U.S. Aggregate Bond Index shed slightly with losses concentrated in the corporate bond market. Russia’s intentions toward Ukraine and the possibility of a summit remain the biggest near-term risks to markets. The personal consumption price report will give additional insight into incomes, spending, and inflation.

CTN 02-21-22 Image 1

Why is the Market so Volatile?

Market volatility is on the rise. As the graph above shows, the S&P 500 has dropped more than 1% ten times already. Before jumping into the key reasons for the volatility, the chart shows this type of volatility isn’t unprecedented. Other years have seen high numbers of declines in the first two months of the year. Beyond January and February, the S&P had a pair of two-month periods in 2018 that saw 10 days of 1% declines. Early 2020 marked even higher volatility as COVID-19 entered our world.

The past volatility also reminds us corrections are a normal part of investing. Technically, the S&P 500 hasn’t even officially reached correction territory as it hasn’t closed down by more than 10% from its all-time record set earlier this year. Even if the market declines further this week, it really doesn’t change the historical fact that we should expect periods of volatility.

Downturns rarely happen for no reason, and understanding the reasons behind market movements can make it easier to be steadfast during periods of volatility. 2022 is off to a volatile start for three major reasons:

  • Russia threatening Ukraine
  • Inflation and interest rates
  • Lower sales and earnings projections for corporations

Russia and Ukraine

Russians threatening Ukraine with invasion is a different kind of risk than inflation or earnings revisions. The range of outcomes is much wider, and the risks involve people’s lives, not the prices of used cars. The risk of a land war in Europe raises concerns about a large conflict involving multiple countries. It brings to mind World War I or the early aggression by Nazi Germany that preceded World War II.

For many this conflict seems new. It actually started in 2014, when Russians took territory from Ukraine. The ongoing conflict has costs 13,000 people their lives.

Our view is Russian aggression would likely lead to a market correction that would hurt Europe more than U.S. markets. Europe imports much of its energy from Russia. During the 2014 conflict, the MSCI Europe index fell 2.5%, but the U.S. market dropped only 0.7%. We would expect the short-term reaction to be larger than in 2014 if Russia launches a full invasion.

Inflation and Interest Rates

Closer to home is the uncertainty about how quickly the Federal Reserve will raise interest rates. Some investors are worried inflation won’t respond to slightly higher rates and the Fed will be forced to raise rates rapidly to snuff out inflation. Others see the Fed as raising rates too quickly and undercutting the recovery. The value of earnings drops when interest rates increase. Growth stocks, which have led the market during the last decade, generate more of their earnings in the future and are more sensitive to changes in interest rates. The Russell 1000 Growth is down 13.6% this year, while the Russell 1000 Value is only 3.8% lower.

Lower Sales and Earnings Projections

Difficult comparisons and lower expectations have also been a challenge to many stocks. The list of steep declines includes key names in social media, streaming, and online commerce. Some of these companies were big beneficiaries of the move online during the pandemic and the large economic support checks issued by the government. But competition and slowing growth have caused declines of more than 35% in multiple large companies.

The Key Risk

What makes this environment more challenging is the risks are heightened at every level. Geopolitical, economic, and individual company risks are always present. Today each seems at elevated levels. Russia’s potential invasion is a geopolitical uncertainty with widely unknown outcomes. High inflation and uncertainty around interest rate policy have created a wider set of economic outcomes than normal. Big swings in the future expectations for previous market winners have created big swings in some popular companies.

Yet, none of those risks is as important as the key risk, which is how investors react to challenges. All these types of risks ebb and flow. Sometimes they can be quite severe. Other times they produce swift market reactions. While these swings can set portfolios back, quite often the biggest damage comes from overreacting to risks and pulling out of the market.

Think about your portfolio like being on exercise equipment. If you get on a machine that is more challenging than you want today, it doesn’t mean you shouldn’t use the machine. Instead, just dial back the difficulty or lower the weight until it is at the right level. Long-term returns are the rewards for bearing the risk of being invested. If today’s markets are proving difficult, reach out to your advisor and see if dialing back the risk might make our portfolio’s workout a little easier to bear.

The Great College Debates

During the past two decades, pundits across the United States have launched all kinds of debates about college and its importance. They have asked:

  • Is college a good investment? In 2011, as the economy and Americans slowly recovered from the Great Recession, the idea that “college, the perennial hope for the next generation, may not be worth the price of the sheepskin on which it prints its degrees,” gained popularity, reported Daniel Smith of New York Magazine.
  • Which college majors are worth the cost? As everyone weighed the value of knowledge against the cost of attaining it, news media began reporting on the highest paying college majors. In general, science, technology, engineering and math majors tend to receive the highest incomes after graduation, according to Payscale’s 2021 College Salary Report.
  • Should employers remove college degree requirements from job listings? Today, some are looking at the college picture from a different perspective. “According to data from the U.S. Census Bureau, between 2010 and 2019, 36% of Americans ages 25 and older had a bachelor’s degree or higher. Yet 65% of job listings still require postsecondary education and 61% of HR and business leaders say they throw out resumes without college degrees even if the candidate is qualified,” reported Hunter Johnson in Forbes.

There is evidence that college degrees improve economic outcomes, overall. As with almost anything, though, there are exceptions. In 2021, the Georgetown University Center on Education and the Workforce reported:

The lifetime earnings of a full-time full-year worker with a high school diploma are $1.6 million, while workers with associates degree earn $2 million. However, at least one quarter of high school graduates earn more than associates degree holders. Bachelor’s degree holders earn a median of $2.8 million during their career, 75% more than if they had only a high school diploma. Master’s degree holders earn a median of $3.2 million over their lifetimes, while doctoral degree holders earn $4 million and professional degree holders earn $4.7 million. However, one quarter of workers with a bachelor’s degree earn more than half of workers with a master’s or a doctoral degree.

Georgetown University Center on Education and the Workforce

The debate about college costs and payoffs continues. However, some companies are deciding that talent and a strong work ethic are just as important as a college degree, and have begun removing degree requirements for job applicants, reported Glassdoor.

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 phishing@irs.gov 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 phishing@irs.gov 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

February 24, 1836: Alamo Defenders Call for Help

On February 24, 1836, in San Antonio, Texas, Colonel William Travis issued a call for help on behalf of the Texan troops defending the Alamo, an old Spanish mission and fortress under siege by the Mexican army.

Though Santa Ana’s 5,000 troops heavily outnumbered the several hundred Texans, Travis and his men determined not to give up. On February 24, they answered Santa Ana’s call for surrender with a bold shot from the Alamo’s cannon. Furious, the Mexican general ordered his forces to launch a siege. Travis immediately recognized his disadvantage and sent out several messages via couriers asking for reinforcements. Addressing one of the pleas to “The People of Texas and All Americans in the World,” Travis signed off with the now-famous phrase “Victory or Death.”

Only 32 men from the nearby town of Gonzales responded to Travis’ call for help, and beginning at 5:30 a.m. on March 6, Mexican forces stormed the Alamo through a gap in the fort’s outer wall, killing Travis, Bowie, Davy Crockett and 190 of their men. Despite the loss of the fort, the Texan troops managed to inflict huge losses on their enemy, killing at least 600 of Santa Ana’s men.

The defense of the Alamo became a powerful symbol for the Texas revolution, helping the rebels turn the tide in their favor. At the crucial Battle of San Jacinto on April 21, 910 Texan soldiers commanded by Sam Houston defeated Santa Ana’s army of 1,250 men, spurred on by cries of “Remember the Alamo!” The next day, after Texan forces captured Santa Ana himself, the general issued orders for all Mexican troops to pull back behind the Rio Grande River. On May 14, 1836, Texas officially became an independent republic. Texas joined the Union in 1845.

Weekly Focus

It is only the blind eye of the adult that finds the familiar uninteresting.

Margaret Wise Brown, American Writer

The bad news is time flies. The good news is you’re the pilot.

Michael Altshuler, American Motivational Speaker