KARA MURPHY, CFA | 03/15/2022
As the Federal Reserve contemplates its next steps, it’s keeping a close eye on the war in Ukraine and the implications for the U.S. economy. The war, however, hasn’t changed the Fed’s playbook: The central bank will remain largely focused on the same economic metrics it’s been monitoring all along.
Many of those indicators are holding up relatively well amid inflationary pressures and other risks:
The labor market, for instance, is still remarkably tight. Job openings remained near record highs in January, and the number of unemployed people per job opening (0.6) was near pre-pandemic lows. That’s according to the Labor Department’s monthly Job Openings and Labor Turnover Survey report, a contemporaneous look at hiring trends.
The Institute for Supply Management (ISM) Manufacturing New Orders Index has retreated from its post-pandemic high but remained at healthy levels as of last month. The New Orders Index is a subindex of the composite ISM Manufacturing Purchasing Managers’ Index (PMI). The PMI reliably predicts growth across the U.S. economy.
The U.S. Treasury yield curve, another reliable predictor of economic activity, has declined since the start of the year but remained in positive territory as of last week. The yield curve depicts the difference in yields (or spread) between 2- and 10-year Treasury bonds.
ISM New Orders
With the release of key indicators for March, the Fed and investors will have a better sense of the war’s economic fallout. We’re likely to see a bigger impact on Europe than on the United States — and not just because we’re farther away from the battlefield:
Energy prices have surged since the start of the invasion, and Europe depends more heavily on Russian energy imports than we do. The U.S. produces a lot of its own energy, and a big portion of our domestic spending has shifted from commodities to services over time.
Higher energy prices benefit the vast U.S. oil and natural gas industry, which accounts for an estimated 8 percent of GDP.
It’s worth noting that lower-income Americans tend to be more affected by high gas prices than consumers with high levels of disposable income are. But they’ve also benefitted disproportionally from wage gains during the recovery, which should help to mitigate some of the pain at the pump.
Price of West Texas Crude
Interestingly, the most-likely probability for the year-end Fed Funds target rate has remained fairly consistent since early February, according to the CME Group’s FedWatch Tool:
- On February 9th — about two weeks prior to the invasion of Ukraine — investors in the Fed-funds futures market assigned a roughly 40% probability to a cumulative rate hike of 175 basis points by year’s end. The same held true on March 2, 8 and 9.
Yet, over the same period, market expectations for an even higher year-end target rate have climbed. Some investors now believe there’s a slight probability that the Fed could raise its target rate by a cumulative 250 basis points by the end of the year.
Tighter monetary policy, high inflation and the war in Ukraine have weighed on U.S. stocks. But there is a silver lining to market’s recent downturn. By most metrics, S&P 500 valuations have retreated since the start of the year. In fact, the market’s price-to-forward earnings ratio has fallen to pre-pandemic levels.
S&P Price to Earnings
While stocks aren’t cheap, they’re less expensive than they were in late 2021, which may present investors with good buying opportunities. As the recovery matures, we continue to favor high-quality stocks, or those with reliable growth models and strong balance sheets. Market downturns may also be an opportune time for investors to rebalance their portfolios, with the aim of buying low and selling high.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Private Wealth Services, LLC, Kestra Investment Services, LLC, Kestra Investment Management, LLC, Bluespring Wealth Partners, LLC, and Grove Point Financial, LLC. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by any entity for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Private Wealth Services, LLC, Kestra Investment Services, LLC, Kestra Investment Management, LLC, Bluespring Wealth Partners, LLC, and Grove Point Financial, LLC does not offer tax or legal advice.
ABOUT THE AUTHOR
Kara Murphy, CFA
As Chief Investment Officer of Kestra Investment Management, Kara brings her extensive expertise to partner with the independent financial professionals associated with the Kestra Holdings ecosystem. Kara and her team provide hands-on support, that includes market commentary and research, guidance on portfolio construction, and a broad array of investment solutions designed to empower financial professionals to serve their clients’ wealth management needs.
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