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On Point Market Commentary

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First Quarter 2022 Markets Update

The first quarter of 2022 saw the capital markets take a breather from gains seen in 2021. Both the broad equity markets and fixed income markets saw losses in the first quarter, with equities posting their first negative quarter in two years, and fixed income posting a second consecutive quarterly loss, all culminating in a rare -5% negative return for a typical 60 equity/40 fixed income portfolio.

Key Takeaway: The most utilized broad asset allocation, 60% stocks and 40% bonds, saw a rare negative quarterly return of ~5%.

So, what brings the recent market volatility to our doorstep? There are plenty of reasons, but one of the main culprits is the financial world has grown accustomed to liquidity, and that liquidity is going to be removed rather swiftly due to the inflation we are seeing set in globally. With United States and European inflation in the high 7% to mid 8% range, we are starting to see inflation adjusted disposable income decline, and that is spooking both the US Federal Reserve as well as the European Central Bank. Focus remains on the threat to raise interest rates and drain liquidity from their respective economies to tame inflation by putting the brakes on economic activity. The following statistic jumped out as eye opening when thinking about global excess liquidity: since COVID was declared an emergency, world central banks have conducted $800 million of assets purchases (fancy term for money printing) every hour of every day since early 2020. That liquidity helped stave off a global financial/ economic collapse of untold magnitude, but now comes the challenge of putting the proverbial liquidity genie back in the bottle.

Key Takeaway: Inflation is forcing the world’s Central Banks to withdraw liquidity from the markets.


Food Crisis on the Horizon?

For decades, a positive combination of rising incomes, world trade, and lower food prices helped decrease global hunger rates significantly. Global progress was so good that in 2015, the United Nations set a goal of eliminating world hunger by 2030. COVID-19 has badly reversed the situation, as roughly 160 million more people have fallen back into chronic hunger. As a result, 1 in 10 people in the world are undernourished today, and that figure is expected to rise sharply due to the Russia-Ukraine war. We have observed in wealthy nations that higher food costs and a lack of choice is developing, while in poorer countries the situation is becoming a higher risk of famine. Not only are farm yields going to be down due to the remnant supply chain woes of COVID and a low yield planting season in bread basket Ukraine, but fertilizer prices have soared, virtually locking in higher food prices at least through the remainder of this year and into the next southern and northern hemisphere growing seasons of late 2022 into 2023. This is not only concerning from a humanitarian standpoint, but should also have a significant impact via stubbornly high inflation that will continue to affect all consumers.

Key Takeaway: Inflation in food will at a minimum continue to strain consumer wallets, and could possibly lead to social unrest in many parts of the world where access to quality calories may lead to famine.

US Producer Price Index

As we head into the Spring and Summer, we will continue to monitor the events surrounding COVID, the Russian invasion of Ukraine, and the policy responses from world political and financial leaders. The road ahead appears to be a bumpy one, so taking time to periodically assess your financial situation and making any needed changes is always advisable, especially in times like now. We appreciate your confidence and trust in our team and will continue to work to earn that now and in the future.
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