S2-20: Market Free Fall, April Inflation & Deep Dive on Why is Childcare So Expensive

Last week, we saw the 6th consecutive week of down markets, with both the S&P 500 and NASDAQ hitting new lows, as investors continue to digest the latest Fed rate hike and last week's April inflation numbers. Catch it all on this week's podcast, along with a deep dive on the childcare dilemma featuring three Early Childcare Center directors to talk about the challenges facing their industry, why is childcare so expensive, and the impact it has on the economy more broadly.

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Weekly Market Update

Last week, the market continued its downward trend, finishing down -2.41%, the sixth consecutive week of negative performance. For the month of May to date, the S&P 500 is down -2.6%, and is now down -15.6% year-to-date. The more volatile, tech-heavy NASDAQ is down further, -24.5% for the year, firmly in bear market territory. Day to day market performance continues to be more volatile than normal with ongoing Q1 earnings season bringing more negative guidance by companies for the year to come, and inflation concerns paired with tightening monetary policy weighing heavily on investor outlooks.

In general, interest rates have continued to increase across the maturity spectrum year-to-date. However, last week, 10-year yields moderated after jumping past 3% the week prior in the immediate aftermath of the Fed's second rate hike, and ended last week at 2.92%. Recall, the Fed is expected to announce a series of interest rate increases this year, the first of which occurred in March, followed by a second, +50bps increase earlier this month, along with plans to reduce their balance sheet holdings, in an effort to tighten monetary policy and reduce inflation to more normal levels.

Related Post: 5 Factors Driving Higher Inflation & What You Can Do to Prepare

With the rise in interest rates, there has been more focus and discussion of 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.

Fed's Tightening Monetary Policy

The biggest economic news so far this month is the Fed's May FOMC statement. Investors anticipated another rate hike, and given recent clearly articulated guidance from the Fed, most also anticipated the specifics of the May announcement: +50bps increase in the Federal Funds target rate AND the start of actions to reduce the Fed balance sheet beginning June 1.

As a reminder, over the last 2 years, in an effort to help the economy recover from the recession-induced by the pandemic and its related lockdowns, the Fed used more accommodative monetary policy to help stimulate an economic recovery. Essentially, this means holding the Fed Funds target rate near 0%, and once rates were at zero, using their balance sheet to help push long-term interest rates even lower.

How does the Fed do this? Through a process known as Quantitative Easing, or QE. The pandemic recession is only the second time QE has been used as a tool of monetary policy here in the US; the first time was to aid in purchasing toxic mortgage assets to help banks clean up their balance sheets during the Great Recession.

This time, the Fed essentially created money and then puts it into circulation by purchasing US Treasury Bonds and Mortgage-Backed Securities in the open market. They no longer actually print currency, but just digitally add cash to their balance sheet, then transfer it to banks or the government to pay for their asset purchases. This allowed the Federal government to issue more debt to fund its Covid relief stimulus packages, at lower interest rates, and also allowed banks to give consumers mortgages at lower interest rates, than otherwise possible if the Fed hadn't been major a buyer of those assets. This is what pushed mortgage rates to all-time lows last summer.

The Fed added nearly $5 trillion to its balance sheet in 2 years, more than doubling it, and dwarfing what was spent in the Great Recession. And that $5 trillion made its way out into the economy, increasing the dollars out there chasing goods and services. Now, faced with 40-year high inflation, that the Fed's overly accommodative policies very likely contributed to, they are shifting to tightening monetary policy.

This means in order to address rising inflation, they will enact a series of increases to the Federal Funds target rate. This is the rate that banks borrow at, which in turn means banks will increase what they charge you, me and businesses to borrow at too. Increasing the cost of borrowing should slow demand, in turn, slowing the pace at which prices are rising.

Example: if an auto loan now costs 7% instead of 3-4%, the monthly payment is higher for the same car. It might dissuade some buyers from buying a car right now. The same is true for homes with higher mortgage rates, and even consumer discretionary items more broadly, from toys to apparel, as credit card rates are rising too.

In addition to raising the Fed Funds rate, the Fed is also going to begin to take actions to reduce the size of the Fed balance sheet. Over the last 2 years, they were active buyers of US Treasury bonds and mortgage-backed securities. As those bonds were repaid, they reinvested those funds to buy more. Beginning June 1st, they will stop reinvesting funds as bonds are repaid up to a given monthly cap, which will increase after 3 months. This should further reduce the dollars in the economy, and aid in reducing inflation (while also increasing longer-term interest rates, which we have already seen over the start of 2022).

So what does this mean for the markets? Well, it's a big reason for the market sell-off this year. If we look at historical Fed rate hikes, particularly when faced with inflationary pressures, it results in an increase to long-term interest rates, and downward pressure on the stock market.

If we look to the early 1980s as the best historical case study analogous to the current environment, Fed Chairman Paul Volcker demonstrated his commitment to fighting inflation by taking the Fed Funds rate from 10% to 20%, not once, but twice, triggering a double-dip recession, before inflation finally subsided to more normal levels.

Volcker's actions during that time period, referred to as the Volcker Shock, guide much of the Fed's current policy actions and dual-pronged mission - of stable prices and employment. His actions restored faith and credibility in the Fed, and also laid the groundwork for the stable, low-interest rate economic environment we have all benefitted from for the better part of the last 40 years.

How much further and longer will this current market correction last? It could take the better part of a year or more for inflation to stabilize. And until inflation responds to the Fed's monetary policy actions, I would anticipate continued market volatility and downward stock market pressure. Only then, when investors feel more confident and certain of the economic outlook - stable price growth, stable interest rates, stable labor market, stable profit margins - will we see less volatility and a return to more normal, long-term market performance trends.

April Consumer Price Index

Last week, the Bureau of Labor Statistics released the Consumer Price Index results for April 2022. While many were calling March the inflation peak, and hoping for a marked slowing for April, April CPI was up +8.3% vs. April 2021, down just 0.2% from March's 8.5% mark.

The slight moderation was entirely due to the decline in energy prices from March peaks in the immediate aftermath of the Russian invasion of Ukraine. All other major categories still show significant inflationary pressure, with food up 9.4% YOY and core CPI, excluding food and energy, up 6.2% YOY, showing signs of inflation accelerating in many sub-categories.

Every major category now shows year-over-year price increases well above the Fed's 2% long-run average target. The slight moderation seen in April due to lower energy prices, has largely been erased in the commodity markets in recent weeks, and currently see little indication any other commodity prices are moderating. Even if prices just freeze where they are we would still see CPI increases north of 3% through the end of 2022... and that's highly unlikely.

For more on food pricing pressures and energy pricing pressures, be sure to check out past podcast deep dives on Agriculture featuring farming experts from last month and with Gas Buddy's Petroleum Analyst, Patrick DeHaan, from earlier this year.

Why is Childcare So Expensive

This week's podcast deep dive features a conversation with three Early Childcare Center administrators to talk about a struggle too many Family Finance Moms share - childcare. Why are there too few spots, why is childcare so expensive, while at the same time, childcare providers remain among the lowest-paid employees out there? Lack of affordable, accessible childcare keeps women out of the workforce, while inadequate childcare provider wages fail to attract enough providers for there to be more childcare. Listen as we outline the key issues impacting the state of early childhood care today, how the pandemic brought longstanding struggles to the forefront, and what these industry experts suggest could be policy changes that would actually make a difference.

Thank you to Cori, Joanna, and Stacey for sharing their experiences, hearts, and hopes for the future of early childhood care and education. You can learn more about each of them below.

Cori Berg, Executive Director, Hope Day School - Dallas, TX

Cori Berg has been a teacher, director, advocate, trainer, and consultant in the field of Early Childhood Education for over 25 years in public, private, and faith-based settings. Her professional interests include incorporating the arts in curriculum, team building, and educator resilience. She is the Executive Director of Hope Day School in Dallas, Texas. She is the creator of ECE from the Heart with Cori Berg, a Facebook page and community to support educators and administrators. She was awarded the 2020 Administrator of the Year by the Texas Association for the Education of Young Children.

Joanna Bardis, Head of Admission, Licensed Childcare Center - Atlanta, GA

Joanna is the Head of Admission at a licensed childcare center in Atlanta, GA. Her expertise is in unpacking and understanding state rules and regulations and how this translates to compliance in the classroom setting. She is passionate about advocating for access to quality childcare for all children. She has an M.Ed from Mercer University. Joanna is also the mother of two kids ages 3.5 and 2 who would also tell you they are very much involved in the admissions process. In her free time, Joanna loves reading & hiking. 

Stacey Viviano, Director, Early Childhood Center - Houston, TX

Stacey Viviano is a 5^th generation member of Messiah Lutheran Church. Messiah Lutheran Church started an Early Childcare Center in 1983, I was the second child enrolled at the age of 3. I worked as a teacher assistant after high school. I attended Trinity-Messiah Lutheran school and graduated from Lutheran High North in 1998. I have been a part of Messiah Lutheran Early Childhood Center, either as a student, staff member or director for 20 years. I have been the director for 17 years.

I have been happily married to my husband for over 12 years. We have 4 beautiful daughters. Each of my daughters attended MLECC for their first 5 years of life, they would tag along with mom to work every day. 

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Coming up in the week ahead: this week we get the first of several monthly releases on the April housing market, including Housing Starts on Wednesday and Existing Home Sales on Thursday.

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