The Monthly Mosaic | February 2022


TRANSCRIPT

So far in 2022, has been a much different environment than what we saw in 21. We ended 2021 with an 11% run in the fourth quarter. And so far here in 2022, we've actually had a peak to trough decline of about 12%. The s&p 500 fed a little bit of recovery since the end of that last week in January. But overall, the environments just changed. So we had an environment last year where there's lots of stimulus, both fiscal and monetary. And you know, that's starting to come off the picture is much different and no fiscal stimulus on the horizon, the Fed is looking to become much tighter. And you know, I think that it's kind of the impetus of this. heightened volatility really started when the Fed men's got released in early January showed that maybe they might have to be quicker with quantitative tightening. And that got investors again, a little bit more jittery in terms of what might be ahead in terms of the reduced liquidity happening quicker than maybe what they had in mind before.

A lot of what we've seen recently has been attributed to what the inflation outlook has changed continues to be a lot stickier than the Fed had believed it was going to be in early 21. But we also have the point where the Fed and the market are in much different places and their beliefs of how much interest rate hikes are necessary for 2022. The Fed is sticking to right now there are three hikes they believe for 2022. The market is already priced, at least in the futures market for six hikes, a lot of participants are even forecasting seven or more. So certainly, there's a stronger sense that rates need to go higher in the marketplace. And that's really what's kind of caused a lot of the equity market volatility. I think when you get through towards the end of 2022, you will see that growth is slowing, we have a number of metrics that we're looking at that that do point to level still have a good year of economic growth, but it will be much slower than 21. And it was there's a good chance that later in the year inflation will be coming down to a level that maybe there's been a little bit of opportunity opened up in that front or front portion of the yield curve, given the aggressive pricing of the market versus the Fed.

CPI came in at 7.5% year over year, highest number we've seen in 40 years. And certainly, that's been what's the driving force with the increases in interest rates. If you look at where the interest rates have come higher, it's been on the shorter portion of the curve, you know, really kind of the short term up to five years, has repriced, up to around two close to 2%. So certainly inflation is on the mind of both the bond market and the stock market. As you've seen that those longer duration assets, both stocks, and bonds have come off. But we think again when you look through inflation, longer-term, there are some signs that it could be adding as we move throughout 2022. If you look at the manufacturing side of the economy, certainly the manufacturing is m numbers have peaked and are coming down. When we look at supply chains, the supply delivery times backlogs, order backlogs are all declining, and also prices paid. So there are some signs of the manufacturing side of the economy is slowing. And that maybe yes, that by the end of the year, inflation starts to slow down. And maybe the level of interest rates that are being priced into the market don't necessarily have to happen, given that we do anticipate the economy start to cool off after the very hot year we had in 21.

We anticipated that this year was going to be more volatile. We anticipate actually that that would probably have happened late last year as the environments changing from liquidity to kind of the withdrawal of liquidity. And it's really a regime change in the market's eyes. And it's just we believe that yes, there could be pockets of volatility. We're experiencing it right now. Still Believe the economy's on good footing. Earnings Growth should still be strong. But overall, we've had an amazing three-year stretch in the marketplace. We could be a little bit of time for a little bit of clawback on some of those returns. We anticipate that you know 2022 is going to be much more muted year for equities, but still, nothing that's overly concerning at this point because we don't have a recessionary forecast at play at this time.


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