Economic Overview Q1 2022: Inflation

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Rob’s Thoughts on Inflation:

For my entire 30-year professional career, inflation has never been a factor. I have endured five bear markets, yet the peril of high inflation has not been a consideration for my clients ever until this year. Inflation is the dominant theme of this quarter’s Economic Overview. See below for a breakdown of our thoughts on inflation.

Those are my thoughts, have a great Thursday.

The Breakdown:

Q1 of 2022 was the first time we started to see the effects of inflation and rising interest rates on the domestic stock market. During 2021, inflation started ripping higher, and the Fed forecasted higher interest rates on the horizon. Even so, the market remained hopeful that easing supply chain issues could help with inflation while economic data held strong. Ultimately, all of the money that has been pumped into the system over the last two years has led to an inflation issue.

Higher inflation and interest rates are clear and present, and the stock market has taken notice. The concern on Wall Street is that the Fed will raise interest rates too high or move them too quickly and push the economy into a recession. This puts the Federal reserve on a tightrope, trying to balance high inflation against high unemployment in order to attain a “soft landing”, or recessionless end result.

Fortunately for both the Fed and the overall economy, consumers continue to look very strong, and unemployment rates have fallen back to near all-time lows. There have been 1.69* million jobs filled in the first three months of 2022, and many of these new jobs have come with higher wages, further strengthening the consumer. Because we all love spending money on both products and experiences, strong consumers lead to good companies performing at a high level. As earnings season commences, it will be essential to watch how these companies perform as a whole.

While in the short term, concerns about rising rates, or concerns about the conflict in Europe can weigh on the stock market, company performance will direct the route of the stock market in the long term. As the great investor Benjamin Graham once said, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” We are keeping a close eye on company earnings and performance, along with unemployment. Both appear to be strong.

If the fundamentals of the economy can stay on a positive trajectory, that increases the probability of a “soft landing.” Jobs, data, and quarterly earnings are what we will continue to watch as we move forward this quarter.

As always, please reach out with any questions! These are our thoughts, have a great Thursday.

~Austin Smith, CFA