Private Client Group

March 21st, 2022

Fed Raises Rates, More Supply Chain Woes, Wild Oil Price Swings

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In today’s Steady Investor, we dive into key factors that we believe could impact the future of the market such as:

The Federal Reserve Raises Interest Rates – During this week’s policy meeting, the Federal Reserve raised the fed funds rate by a quarter-point. The action was widely expected by financial markets (stocks rose on the day of the announcement) as the central bank looks to fight inflation through a series of gradual rate increases. Fed Chair Jerome Powell projected six more rate hikes to follow this year, with the hope that higher interest rates will slow investment and soften demand in the economy, offsetting rising prices. The Fed slashed interest rates close to zero and engaged in quantitative easing in response to the pandemic, in an effort to stimulate the economy. However, the economic rebound has been faster than expected and the Fed did not anticipate that supply chain issues would drive up prices for a prolonged period. Central bankers are now taking action to tame inflation and moderate the future pace of growth. Investors will be closely watching to see whether the projected path of rate increases will have the desired effect on inflation, while not cutting off the economic recovery.1

Do You Know That There Are Silver Linings in Market Volatility?

It’s been a challenge for investors to adjust to market volatility, especially during the current geopolitical crisis. Trying to predict the future of the market can result in discomfort and uncertainty. Instead, we recommend that investors learn the positives of volatility. Long-term investors should understand:

If you have $500,000 or more to invest, get our free guide, “Using Market Volatility to Your Advantage” and learn our insights, based on decades of experience, about how a volatile market may be able to help investors refine their strategies and potentially generate solid returns over time.

Download Our Guide, “Using Market Volatility to Your Advantage”2

China’s Factories Face New COVID-19 Shutdowns – Are More Supply Chain Problems Ahead? Facing the largest outbreak of COVID-19 cases since the height of the pandemic, five of China’s key manufacturing cities have been locked down by the Chinese government. Many international companies have halted production at their factories as a result, including carmakers Toyota and Volkswagen, and Apple-product manufacturer Foxconn, among others. The crackdown by Chinese authorities has also included closing highway exits and enforcing mandatory testing roadblocks in route to shipping docks, resulting in further delays in the shipment of goods. While the timeline for China’s renewed COVID battle is uncertain, the immediate impact is certain to be a continued rise in already-high international freight costs and further strain on global supply chains, which could add even more pressure to prices at a time when inflation is, of course, running hot.3

Oil Prices Endure Wild Swings – Just last week, the price of oil was soaring toward $130 a barrel, spurred on by investors’ speculation that rising demand from strengthening global economies – coupled with OPEC’s slow-walking of increased production and the likely lag for U.S. producers to ramp up – would continue to put upward pressure on prices. This week saw a sharp, temporary reversal of this trend, with oil prices falling close to -20% in just three trading days. The drivers of this reversal appear to be largely tied to China, with the previously mentioned new lockdowns and the possibility of reduced manufacturing and trade in the near term. Oil markets also trade on future expectations of supply, and the market may be attempting to price-in the possibility of increased production later this year or next. Either way, the uncertainty has unwound some of the speculative activity which previously drove oil prices, but it has done nothing so far to lessen the cost of energy to consumers. According to the Bureau of Labor Statistics, U.S. consumer energy costs rose 25.6% in February from a year earlier, compared with a 7.9% overall inflation rate. The upshot is that U.S. households spend about 4% of total discretionary income on energy, but higher gas prices can nevertheless impact sentiment.4

Russia is on the Verge of Defaulting on its Foreign Currency Debt – The Russian government recently missed an interest payment to foreign holders of Russian sovereign bonds. The country now has less than a month to pay the $117 million in debt due before it will technically be in default. The scenario is further complicated by Russia’s inability to access the western clearing systems used to settle these payments–part of recent sanctions imposed on the country following their invasion of Ukraine. While the impact of the prospective default will be severely felt by direct bondholders, the wider impact to global markets looks to be fairly limited. Russian debt held by foreigners numbers in the billions, compared to the over $24 trillion held in government debt securities markets worldwide. The amount of foreign exposure to Russian currency debt–about $40 billion in bonds denominated in dollars and euros–pales by relative comparison. In our view, Russian debt levels are too small to make much of an impact on the global economy.5

Silver Linings to Market Volatility – It may be hard to find the silver linings of volatility in the current geopolitical crisis, but that doesn’t mean they aren’t there. To help give you additional insight into how you can make the most of turbulent times, I recommend reading our guide “Using Market Volatility to Your Advantage.”6

This guide can help you get ideas on:

You will also learn our insights, based on decades of experience, about how a volatile market may be able to help investors refine their strategies and potentially generate solid returns over time. If you have $500,000 or more to invest, download this free guide today by clicking on the link below.

Disclosure

1 Wall Street Journal. March 15, 2022. https://www.wsj.com/articles/fed-wrestles-with-the-challenge-of-how-quickly-to-raise-interest-rates-11647336602?mod=djemRTE_h
2 Zacks Investment Management reserves the right to amend the terms or rescind the free Market Strategy Report offer at any time and for any reason at its discretion.

3 New York Times. March 15, 2022. https://www.nytimes.com/2022/03/15/business/covid-china-economy.html

4 Wall Street Journal. March 15, 2022. https://www.wsj.com/articles/china-covid-19-lockdowns-rattle-oil-markets-add-to-uncertainty-11647382006?mod=djemRTE_h

5 New York Times. March 15, 2022. https://www.nytimes.com/2022/03/15/business/russia-debt-bonds-default.html

6 Zacks Investment Management reserves the right to amend the terms or rescind the free Market Strategy Report offer at any time and for any reason at its discretion.

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable.

Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

It is not possible to invest directly in an index. Investors pursuing a strategy similar to an index may experience higher or lower returns, which will be reduced by fees and expenses.
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