Market Update 4-4-2022
Last week, we saw the end of March, the end of the first quarter and the start of a new month. The market eked out a gain for the week, finished up for March, but had its worst quarterly performance since Q1 2020 at the start of the pandemic. In other economic news for the week, we also got an update from the Fed’s preferred measure of inflation, the PCE Price Index, as well as an update on the March labor market. Catch it all on this week’s podcast, along with a deep dive with Mainvest CEO, Nick Mathews, an early Uber executive, on his alternative investment platform that gives small businesses access to capital from local investors.
Monday Market Update (& March & Q1)
Last week, the market performance was mixed, ending the week essentially flat, up just +0.1%, while finishing March up +3.6% on Thursday, and now down just -4.6% year-to-date. The more volatile, tech-heavy NASDAQ is down further, -8.8% for the year, but did make bigger gains last week, up +0.7%. Day to day market movements continue to be more pronounced – an indication of the more volatile, uncertain economic and geopolitcal environment. Last week again saw multiple days with market moves exceeding 1% in either direction, while historically, only about 30% of trading days see market moves over +/-1%.
Last week saw mixed behavior across bond yields. The yield on 10-year treasury bonds fell, as the yield curve inverted, historically, a highly accurate predictor of a future recession. The yield on 10-Year Treasury bonds just surpassed 2% earlier in March, raising rapidly, until slowing and dropping last week to end the week at 2.39%.
The inversion of the yield curve is an indication investors are predicting a market slowdown, and future interest rate drop in response, which they are pricing into longer-term interest rates, dropping them below short-term rates. For more on the yield curve, its predictive power, and examples of a normal, flat and inverted yield curve, please see below.
Recall, the Fed is expected to announce a series of interest rate increases this year, the first of which alrewady occurred in March, in an effort to reduce inflation to more normal levels.
Related Post: 5 Factors Driving Higher Inflation & What You Can Do to Prepare
Interest Rates Update
With the rise in interest rates, there has been more focus and discussion on the yield curve. The yield curve is simply a plot of the current market interest rates, or yields, on the bonds of a single issuer, most often, the US government. The current yield curve for US treasuries has jumped significantly in recent weeks, especially for mid-term interest rates, those on bonds ranging in maturity from 2 to 10 years. All rates for 2 years and beyond are now significantly above pre-pandemic levels.
As I mentioned last week, I am closely watching the spread, or difference in rates, between varying maturities. Typically, in normal economic environments, the yield curve slopes up and to the right, with longer-dated maturities, like 10 and 30-year treasuries, having higher yields than shorter-term maturities. And last week, at least part of the yield curve inverted, with 10-year rates dropping below 2-year rates. Historically, an inverted yield curve, when shorter-term rates are higher than long-term rates, has been an almost perfect predictor of a coming economic slowdown.
Most specifically, investors watch the 2 and 10-year yields for signs of inversion, or when the 2-year yield exceeds the 10-year yield. It also is not an immediate indicator. Historically, on average, the inversion occurs 12-18 months before the recession begins. The yield curve inverts because investors are predicting an economic slowdown, which typically results in the Fed dropping interest rates – so they are essentially pricing in that expectation of a future drop in interest rates.
Mortgage Rates
The rise in interest rates (and the Fed’s end of buying mortgage-backed securities) has already had a major impact in the rates you and I pay for credit… especially in the mortgage market.
While mortgage rates are still low by historical standards, they have increased significantly since the start of 2022, and rose again last week. From the low 3s in late 2021, to last week, a national average of 4.67%. This is the highest mortgage rates have been since December 2018.
Daily Commodity Watch
One area you will see daily updates from me on Instagram in the current environment is commodity prices – the market sector most impacted and seeing the greatest volatility as a result of the Russian invasion of Ukraine.
Note these prices are based on one-month forward futures contracts. Oil prices are based on barrels of oil, while wheat futures prices are based on 5,000 bushels per contract. As of the end of February, oil had surpassed $100 per barrel for the first time in over a decade. Wheat prices have also spiked, surpassing $1,000 per contract, or over $0.20/bushel. This is the highest wheat prices have been since a global food crisis in 2007-2008, which was caused by weather, high oil prices (the last time oil prices were over $100/barrel), as well as increasing demand for biofuels and trade restrictions.
Last week, we saw both these commodities fall in price, likely driven by optimism over peace talks, oil was at $99 per barrel, and wheat contracts were trading at $998… however, optimism has waned and both are up again this week.
The rise in price in these essential commodities this increases inflationary pressures not only here in the US, but globally, just when we were hoping actions from the Fed would start to cool things off, and the pressure is definitely on the Fed to act. For more on the historical impact and signaling of grain prices, please see below:
PCE Price Index
There are two major monthly inflation indicators – the CPI and the PCE Price Index, which is the Fed’s preferred measure, as it is based on what we as consumers are ACTUALLY spending money on, as opposed to the CPI’s fixed basket of goods and services. It takes into account substitutions consumer make as prices rise, which inherently almost always makes its increases lower than the CPI index.
For February, the PCE Price Index increased by +6.4% over the last year, with prices on Goods up +9.6%, Services up +4.6%, Food up +8.0%, and Energy up +25.7%. The Core PCE Price Index, excluding the impact of more volatile food and energy prices, was up +5.4%.
The biggest surprise in February’s data was the large one-month increase in food prices, up +1.4% in just one month, the largest monthly increase since the early days of the pandemic lockdowns, and likely an indicator of what’s to come this year, given the significant rise in grain prices already.
The PCE Price Index data is released as part of a larger monthly data set that includes consumer spending and disposable income, as well. Recall that we are a very consumer-dependent economy, and consumer spending accounts for 2/3s of GDP.
As government stimulus from the pandemic has come to an end, disposable incomes have returned to the long-term trendline, consistent with pre-pandemic growth rates. Consumer spending, however, remains elevated. It is this relationship that has economists and investors wary of what is to come – because it is not sustainable. As savings are depleted, consumers will not be able to keep pace with their current levels of expenditures, and if consumer spending slows, so goes the economy.
March Employment Situation
The first Friday of every month, the Bureau of Labor Statistics always releases the Employment Situation Report, outlining changes in the unemployment rate, additions to payrolls, and the overall estimation of the labor force.
As of March 2022, we have *almost* fully recovered from the jobs lost at the height of the pandemic: of the 22 million jobs lost in the first 3 months of 2020, we have recovered 20.4 million, leaving us just 1.6 million jobs short of pre-pandemic payroll levels.
The unemployment rate is now just 3.6%, only 0.1% higher than pre-pandemic rates, and in historical context, extremely low and considered economically as beyond full employment. Full employment is typically considered to be around 4-4.5% unemployment; this allows for job switchers and new entrants to settle into the market. Rates below that are often indicative of an extremely tight labor market, which we definitely see indication of today.
Why is the labor market so tight? Because while employers have rehired many workers, many workers have opted out of the labor force entirely. The civilian labor force is still down 0.2 million workers vs. pre-pandemic levels, with nearly 1.0 million fewer women over the age of 20 in the labor force today than pre-2020.
The tight labor market is leading to rising wages. If you look at the civilian labor force as the supply of labor and compare it to the demand for labor – measured as a combination of current payrolls plus job openings – the labor market has never been tighter than in the last 3 months. Demand also doesn’t fully capture that anecdotally employers are saying many workers want to work fewer hours – which means you need more employees to fill the same demand. That is driving the acceleration in wages.
Hourly wages for non-supervisory employees are up +6.7% over the last year, while hours are down -0.9%, resulting in a +5.8% increase in wages overall. Employers pass on these cost increases to consumers as price increases, with rising wages being another source of inflationary pressure.
Making Alternative Investments Open to Everyone
This week’s podcast deep dive features Nick Mathews, the founder and CEO of Mainvest. An expert in marketing and operational strategy, Nick led the team that launched Uber in Boston back in 2013. While launching Uber in new markets, both suburban and urban, he experienced firsthand local challenges around economic development. He founded Mainvest in 2018 with the goal of empowering communities to determine their own economic development, utilizing new regulations opening up private investment to more individuals and novel investment vehicles facilitated by Mainvest’s platform to align incentives between local community members and small businesses. Mainvest allows you to invest in local small businesses, while local small businesses get access to the capital they need to grow.
Nick Mathews, CEO, Mainvest
Nick Mathews, the CEO of Mainvest, graduated from UMass in 2010, before launching his first start-up, joining Uber as an early employee in Boston in 2013, and most recently, launching Mainvest in 2018 to give small businesses a better option for access to capital and local investors a way to invest directly into their communities, all made possible by new regulations that opened up private investment options to more people.
Connect with Nick:
www.mainvest.com
Nick’s LinkedIn