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Key Points for the Week

  • Consumer inflation jumped another 0.8% in February as energy and food prices climbed further.
  • The Federal Reserve met this week and raised interest rates by 0.25%, the first increase since December 2018. The Federal Reserve also announced that it plans to raise rates at each of the remaining six meetings in 2022.
  • The U.S. banned Russian oil and gas imports as the world continues to ratchet up the economic pressure against Russia.

Approximately 3 million people have now fled Ukraine since Russian’s invasion began in February. Most have gone to Poland, where the number of refugees that have arrived – about 1.8 million – matches the population of the city of Warsaw, Poland’s capital and largest city.

Investors have been sharply focused on the shorter-term implications of the war, which include slower economic growth and rising inflation as commodity prices soar, supply chains falter and some goods become more scarce, reported Matt Peterson of Barron’s.

The Standard & Poor’s 500 Index and Dow Jones Industrial Average are both in correction territory, down roughly 10 percent from previous highs. The Nasdaq Composite is down 20 percent from its prior peak, putting it in bear market territory, reported Nicholas Jasinski of Barron’s.

What we have seen so far is an indiscriminate sell-off, particularly of European equities but also globally…Extremely defensive sectors that were not affected by the crisis have been sold heavily.

A source cited by Francesca Friday and colleagues at Financial Times.

Last week, though, investors appeared to take a deep breath and begin to reassess the risk and potential returns for equities.

Major indices in the United States and Europe fell early in the week before reversing course. By the end of the week, stock indices in London, Frankfort, Paris and Milan had regained lost ground. However, U.S. indices finished the week lower after inflation numbers for February were released and talks between Ukraine and Russia failed to produce results.

Inflation in the U.S. rose 0.5 percent in February, excluding energy and food. That was a slower increase than the U.S. saw in December or January. However, with food and energy, which have risen sharply, inflation was up 0.8 percent and that was higher than December and January numbers. Overall, excluding energy and food, consumer prices were up 6.4 percent over the last 12 months.

During the last two years, the world has experienced enormous change. The COVID-19 pandemic led to rapid growth of e-commerce, a new work order (emphasizing work-from-home), innovation in cell and gene therapies (vaccines), and a rethinking of global supply chains. Some of these changes created opportunities for investors. Now, the war in Europe is layering on a new set of changes that have implications for defense, cybersecurity, energy and, possibly, other sectors of the market.

It can be difficult to remember during periods of upheaval but change often is accompanied by opportunity.

This Week in the Markets

Inflation continued to bound higher last month. The Consumer Price Index (CPI) climbed 0.8% last month and is 7.9% higher than one year ago. The big culprits were food and energy. Food prices leapt 1% last month and gasoline prices increased 6.6% as part of an increase in overall energy prices of 3.5%. Core CPI increased 0.5% as the big increases in food and energy are omitted from core inflation. Car prices, which have contributed to inflationary pressures, were flat last month. Increased rent costs, which are applied to homeowners as well, were a top contributor to inflation.

The world is steadily placing more economic pressure on Russia by increasing sanctions. The U.S. has elected to wean itself off Russian oil, while an expanding group of corporations is exiting the Russian market.

The S&P 500 slid last week and the MSCI ACWI also dropped on concerns that the situation in Ukraine combined with U.S. inflation may produce an adverse market outcome. The MSCI Europe index bounced off recent lows and added last week, while the Bloomberg U.S. Aggregate Bond Index fell as the strong inflation numbers pressured bond prices. In addition to the Fed meeting, U.S. retail sales lead a list of key economic releases this week.

When Will We Get There?

If you travel with young children, you have experienced the joys of answering the same question over and over: “When will we get there?” Today’s investing environment will likely leave many asking the same question regarding the impact of the Federal Reserve’s plans to raise interest rates and the economic sanctions against Russia.

The journey to higher rates began this week. Investor expectations indicate the Fed will raise rates 0.25% at each of the next three meetings and may continue raising rates at that pace for the rest of the year. Many currently expect the Fed to raise rates 0.50% sometime this year to more rapidly contain inflation. The inflation data released last week indicated the Fed has a lot of work to do. CPI jumped 0.8% last month, and core CPI, which excludes food and energy, climbed 0.5%. Both are well above target and indicate the Fed will be focused on inflation throughout this year.

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The challenge with monetary policy is it often takes a year or more before it is fully felt by the economy. The impact on the economy is slowed because many of the economic effects on ongoing projects is limited. If a large building project is already started, it will continue construction and continue to strengthen the economy.

Some factors could speed up the journey. The increase expected this week has been signaled for a while and rates may have already adjusted to future rate hikes. Higher rates pressure some investments whose payouts are further into the future. The recent decline in growth stocks is an example of rate expectations pressuring prices. Declining stock prices can cause people to lose wealth and choose to spend less, lowering the pressure on inflation.

The Fed also just wrapped up its bond-buying program designed to keep long-term rates low. The combination of rate hikes and the likely steady reduction of the Fed’s balance sheet could move long-term rates higher and accelerate the slowing of the economy.

A follow up question to “Are we there yet?” might be “Why can’t we go faster?” A kid’s understanding of speed limits is quite limited, but the question is fairer for the Fed. One reason to go slow is some businesses and market participants may have extended their borrowing in a way that makes them vulnerable to a sharp change in rates. A 1% increase may cause permanent damage that four smaller hikes would avoid.

A second reason is the inflationary environment may change. The decline in COVID cases may spur a move away from inflation-inducing goods spending just as people are willing to return to work. Supply chain challenges may decline, and no one is certain how impactful these potential changes may be on inflation. Raising rates rapidly during a period in which the scarcity of energy supplies in some areas may slow demand as well. Small steady increases in rates with a focus on the trend and the absolute level seem to be the most prudent course.

The same question about interest rate policy can be applied to sanctions. Assuming the military situation remains unchanged, sanctions are a key offensive tool against Russia. Ukraine continues to make a spirited defense, but its military seems likely to be able to slow, not stop the Russian advance.

Sanctions are similar to rate increases in they are likely to pressure the economy with a lag. While the changes in interest rates and the currency are immediate, existing supplies in Russia will forestall deep economic pain. People can also do without for a while before the absence of some goods becomes a challenge. Eventually they start to make life worse and sap the economic and military strength of the target.

Sanctions are unlike interest rates because they are designed to prompt a policy change by key leaders. That decision could be to withdraw from or enter negotiations. It could be to prompt a coup or force a governmental restructuring where some power is passed to a new group. Those decisions are much different from the thousands of small decisions affected by higher rates.

Be patient with each type of policy and realize neither one has reached its destination. Rate hikes will slowly pressure inflation with near certainty, but how long it will take to see results is unclear. For sanctions, it is much more complicated. Like rate increases, they have some effect on a lot of people. As part of their larger goals, they may fail or they may appear to be failing right up to the moment when they work.

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

March 16, 1802: U.S. Military Academy Established

On March 16, 1802, the United States Military Academy was founded by Congress for the purpose of educating and training young men in the theory and practice of military science. Located at West Point, New York, the U.S. Military Academy is often simply known as West Point.

The first military school in the United States, West Point was the site of a Revolutionary-era fort built to protect the Hudson River Valley from British attack. In 1780, Patriot General Benedict Arnold, the commander of the fort, agreed to surrender West Point to the British in exchange for 6,000 pounds. However, the plot was uncovered before it fell into British hands, and Arnold fled to the British for protection.

Ten years after the establishment of the U.S. Military Academy in 1802, the growing threat of another war with Great Britain resulted in congressional action to expand the academy’s facilities and increase the West Point corps. Beginning in 1817, the U.S. Military Academy was reorganized by superintendent Sylvanus Thayer, later known as the “father of West Point.” During the Mexican-American War, West Point graduates filled the leading ranks of the victorious U.S. forces, and with the outbreak of the Civil War former West Point classmates regretfully lined up against one another in the defense of their native states.

In 1877, the first African American cadet graduated from the U.S. Military Academy, and in 1976, the first female cadets were admitted. The academy is now under the general direction and supervision of the department of the U.S. Army and has an enrollment of more than 4,000 students.

Weekly Focus

I think people should have more photos of themselves as children around. There’s no way you can hate that version of yourself.

Warsan Shire, British Poet

Patience is also a form of action.

Auguste Rodin, French Sculptor