I would like to start the spring edition of market perspectives by sharing our heartfelt sympathies for the people of Ukraine. The atrocities we see nightly on television are forever changing, not only the landscape of Europe but the global economy. The Russian invasion of Ukraine along with the spread of Covid from China in 2019, will have a major impact on the future of global supply chains. I have a very difficult time seeing how Russia comes back into the global economy. Without getting into all the geopolitical possibilities, western nations will have to find new sources of energy, raw materials, and food. The media talks mainly about the energy implications for Europe, potentially the biggest threat is to the nations that are major importers of food. Russia is the number one exporter of wheat and Ukraine is number four in the world. Both nations are also major exports of fertilizer along with the components used to make fertilizers. Let’s hope the world can find a way to get food to these nations that will be facing shortages.
We started the year with discussions around how the Federal Reserve Bank will begin raising interest rates and stop the quantitative easing they started back in March of 2020. With these policies, the Fed’s goal is to slow the U.S. economy and rein in inflation, along with getting back to a more normalized monetary policy. At the same time, the Federal Covid stimulus has ended, which by itself will have a slowing impact on the U.S. economy. These policy changes were all necessary but possibly went on too long. U.S. household net worth is now over $167 Trillion and some of the increase was certainly fueled by these policies. With U.S. consumers having such strong balance sheets, the question is how much of an impact the Russian invasion shock will have on our economy. My personal belief is the reopening from Covid lockdowns will continue this year with entertainment, dining out, and travel all rebounding significantly.
With everything that has happened over the past couple of years, from the Covid pandemic and global lockdowns to the Russian invasion of Ukraine, these all will have major impacts on the future of supply chains. Companies have already begun looking to diversify their manufacturing, supply chain, and their partners. This has the potential to be a real benefit to the U.S economy with the re-shoring of manufacturing, along with the potential to increase energy and food production for export. Hydro-carbons have become almost a dirty word in recent years, though we cannot forget that energy security is national security as the Europeans are now discovering. We need bridge fuels to get us to the era of renewable energy and the U.S. can be a big, clean, provider of these fuels. Higher energy prices can be a precursor to a recession as consumers around the world spend more on energy and less on discretionary purchases. Higher commodity prices are effectively a huge tax increase on the entire economy which disproportionately affects lower-income households.
One of the greatest long-term challenges facing the U.S., most European nations, as well as many Asian nations, is population growth. Who could have ever imagined 20 years ago that we would be running out of workers here in the U.S.? There are currently more job openings in the U.S. than there are unemployed workers. The chances of this changing in the near term do not look good, Gen Z is significantly smaller than the Millennial generation, and the baby boomers are retiring in record numbers. Population growth is an important part of economic growth, and without it, we are dependent on worker productivity gains. This has been good for people looking for work, or those changing jobs, as wages have gone up significantly. Wage growth is a “sticky” part of the inflation, and as we approach full employment, can lead to slowing economic growth.
One thought has stayed with me since the invasion of Ukraine, we cannot predict the future, not the geopolitical future, the economic future, or any future! That is why we have a strategy in place that plans for unexpected events like the ones we have recently seen. We do not “react” to these events, but use them as opportunities to rebalance or make minor tweaks to the strategy. As they say, it’s not about timing the markets, but time in the markets.
As always, please share any thoughts or comments you may have.
Brett S Carleton, CFP