2022 Q1 Commentary

Apr 14, 2022

  • On March 11, 2020, the World Health Organization, officially declared a global pandemic. Two years hence, we are moving from a pandemic to an endemic. Endemic means that the infection has reached a steady state where it doesn’t cause large outbreaks but it still circulates, causing individual cases. According to the CDC, Omicron infection generally causes less severe disease than infection with prior variants.
  • Preliminary data suggest that Omicron may cause more mild disease, although some people may still have severe reaction, need hospitalization, and could die from the infection from this latest variant.
  • Although COVID-19 is not on a path to eradication, we are learning to live with it, or at least many are not willing to take extreme precautions and extraordinary measures or live in fear. Masking on airplanes and buses is lifted after April. Many states are also lifting mask requirements in schools and the remaining public areas.
  • We are still in a race between improving vaccines and creating drugs to treat or prevent Covid and one or more new variants that result in “vaccine breakthrough infections”. If the annual flu season is a guide, we still have a lot more to learn about Covid and its long-term effects on our bodies and our minds/behavior. The final chapter is certainly not written, even though many, either through acceptance, bravery or ignorance, are moving on.
  • Inflation remains the biggest concern as we witness prices for food, energy, goods and services continue to increase and remain elevated. We are experiencing inflation not seen for a generation. The market expects CPI to top 10% in the next couple of months before easing (primarily due to the waning Base Effect.)
  • The Powell Federal Reserve is late to respond as it misjudged the duration and severity of this bout of inflation while focusing on healing the labor economy. With the “full employment” mandate reached (3.8% Feb 2022 unemployment rate), the Fed is now turning  to the “price stability” mandate. This means hiking interest rate and the reduction of the pandemic era expansionary Fed balance sheet. Both are headwinds to the equity and bond markets, and of course the general economy.
  • Russia’s invasion of Ukraine on February 24 added significant stress on the global energy and agricultural supply chain, not to mention the humanitarian crisis that will have rippling effects throughout neighboring countries. Russia is the world’s third-largest oil and gas exporter, and Ukraine is a major transit route for the Russian gas that heats homes and fuels economies across Central and Western Europe. Russia also produces a large proportion of fertilizer and has moved to ban exports of ammonium nitrate. Ukraine, known as the breadbasket of Europe, represents 12.8% of world exports in corn and 10.5% in wheat prior to the war. With ports closed, exports cease.
  • The current inflation started with a supply shock and then a demand shock as the economy reopened. With demand recovering (starting with goods and now shifting towards services), manufacturing, transportation, storage and labor have not kept up which leads to persistent price increases. The U.S. economy is still strong for now with a healthy consumer and banking balance sheet. But prolonged inflation and possible rapid increase in rates would dampen economic enthusiasm.
  • From a zero rate environment, monetary policies, such as rate increases, initially will not have much impact on consumer behavior, the economy and supply driven inflation. This means that Chair Powell must raise rates bigger and sooner (frontloading) in hopes to slow the demand portion of the economy enough to see the desired impact on inflation without leading into a recession. Engineering a “soft landing” is tricky when trying to deliver full employment and price stability (2% to 2.5% core PCE).