Market Perspective for March 21, 2022

The week of March 13 finally saw the stock market indexes break out of its five-week losing streak. The major U.S. stock market indexes saw gains of 6 percent to 8 percent for the week. The Dow Jones Industrial Average closed up 5.5 percent. While the S&P 500 finished higher by 6.2 percent. The NASDAQ had a good week, closing higher by 8.2 percent. Because of the calmer markets, the Chicago Board of Options Volatility Index was down 22.4 percent to 23.9. It was the best weekly showing since November 2020.

Markets retreated modestly on Monday with the S&P 500 declining 0.04 percent, NASDAQ 0.40 percent and the Dow Jones Industrial Average 0.58 percent.

The Russian invasion of Ukraine continues into its fourth week, but the markets are taking this in stride. There has been little progress with any negotiations as of today. Russia has expanded its missile attacks to Western Ukraine, while the heaviest fighting is reported in the city of Mariupol.

As expected, the Federal Reserve raised its benchmark lending rate by 25 basis points, which puts the current lending rate in the range of 0.25 percent to 0.50 percent. This rate hike is the first interest rate hike since 2018 and is expected to be the first of several rate hikes this year.

Fed policymakers have indicated that they will raise rates at each of the six remaining FOMC meetings this year. The Fed believes the rate will be near 1.9 percent by the end of the year. Federal Reserve Governor Christopher Walker stated that the Fed might have to raise rates by 50 basis points at least once this year to get inflation under control.

Walker thinks that the Fed should be aggressive at first if there is to be a significant impact on inflation later this year. At the same time, St. Louis Fed President James Bullard stated that the Fed should raise rates to 3 percent by the end of 2022.

Fed Chairman Jerome Powell said the Fed is not seeing any evidence of a wage-price spiral at this time, but there is a “misalignment” of supply and demand in the labor market. A wage-price spiral occurs when workers demand higher wages to pay for increasing prices, which could drive prices up even higher. He also stated that the chance of a recession in the next year is not particularly high.

Chairman Powell also said the Fed made progress at last week’s meeting by starting the process to reduce their holdings of Treasury securities and agency mortgage-backed securities and agency debt. But as of yet, the Fed has not started to reduce the size of its holdings.

The last time the Fed reduced its balance sheet occurred in 2017 – 2019, to the tune of about $50 billion per month. He said that this time, it will be more aggressive. As of today, the Fed’s balance sheet is just below $9 trillion.

There is always a fear that higher interest rates will lead to higher unemployment. The current goal of the Fed is to achieve price stability while maintaining a strong labor market.

Crude oil prices have fallen 15 percent from their recent highs of March 8, which helped the market last week. After the price dropped to as low as $94, it closed the week down 3.1 percent at around $105. It is still up 42.2 percent year-to-date.

Along with the rising rates and the current high inflation rate, government bonds fell during the week, causing yields to rise sharply for a second week in a row.

Mortgage rates also increased over past week. As of March 18, the average rate for a 30-year fixed-rate mortgage stood at 4.48 percent, up 16 basis points (0.16 percent) over last week. The rate for a 15-year fixed-rate mortgage was up to 3.70 percent, up 15 basis points from a week ago.

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