Spring is around the corner. We’re moving the clocks ahead this weekend so we’ll be gaining another hour in the evening. So much to look forward to. I had some good news recently. My home office got a bit of a makeover. My wife agreed to take down her signed poster of the sappy chick flick, “The Notebook.”
In it’s place, I now have a beautiful, yet fake axe hanging. I don’t win many battles in the interior decorating world so I will celebrate this one awhile.
Ok, that’s enough, let’s get on with your 2-Minute Drill for March.
We have major storylines the markets are working through. Russia’s invasion of Ukraine, fed rate hikes and on-going inflation concerns especially in the energy and commodities sectors.
To be sure, they are all interrelated in a lot of ways.
Let’s start with inflation. We got our latest read on the consumer prices this morning with the February CPI report. Headline inflation came in hot again, rising to 7.9%, another 40-year high. And, that reading came before the latest spike caused by the events in Ukraine.
On a human level, it’s heartbreaking to see how much death and destruction is happening in the country right now. Hundreds of civilian casualties and many thousands more without water, food and heat. The bombing of civilians is absolutely horrific.
On the economic side, there are many different factors to consider right now. When the invasion began two weeks ago, I sent out a special letter that highlighted how well the markets have historically reacted to geopolitical crises. I also showed the limited exposure U.S. companies have to Russia and Ukraine.
That said, what’s different this time is the inflation that was already present, particularly in energy prices. Russia’s main export is energy (natural gas and crude oil). So, it’s natural that sanctions and other disruptions to Russia’s energy market to cause supply shortages, which could cause further price spikes. So, we took an economy that was already struggling to deal with rising prices and added another reason for those prices to continue climbing. Federal Reserve chairman Jerome Powell told Congress the added inflationary spike caused by Russia’s invasion was another risk to the economy.
Which brings us to Powell and his colleagues who are meeting next week to discuss hiking interest rates. Powell, himself, said he’s advocating for a ¼ percent hike. That’s a more routine adjustment for the Fed. The speculation around how fast and how far the Fed goes has been a key driver of this year’s volatility. Next week, Fed action will replace some of the talk. I say “some” because speculation will continue on future policy moves.
The pace of those future hikes will depend on whether prices continue rising rapidly. And, we believe, that will be affected by the duration and outcome of the fighting in Ukraine. A resolution there is so important for both moral reasons and economic ones.
Finally, a quick note about the cryptos, which got a big shot in the arm on Wednesday. President Biden signed an executive order calling on the government to study the benefits and risks of digital currencies. He also wants to explore a digital version of the dollar. We’ve been expecting regulation for some time. We believe this is a big step in that direction.
Okay, there you have it. Now go forth and prosper. Or is it live long and prosper? Either way, enjoy this day!
All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.