The housing market has shown exceptional strength after rebounding from the sharp but brief decline in the early months of the pandemic. Many factors have contributed to this—exceptionally low mortgage rates, aggressive stimulus, and the need for more housing as work and childcare were brought home. Now, all of these factors are diminishing while the cost of living is rising due to higher inflation. As a result, the housing market might be heading for a slowdown.

For the past couple of weeks, we’ve been talking about two things: the war in Ukraine (and its effects) and inflation and the Fed. These have very much been the hot topics, and deservedly so. But with a lull in the news on both, it’s time to check back in on Covid, which has not gone away.

Last week, we looked at what inflation actually is—and where it is coming from. As we noted then, three categories (housing, transportation, and food and beverages) account for three-quarters of all spending. So, if we talk about inflation, this is really what we are talking about. As we also noted, those categories have grown faster since the start of 2021, especially transportation. But none of that tells us what will happen over the next year or so. To determine that, we need to take a closer look.

February’s preliminary durable goods orders report was the only major economic data release last week. The report showed that durable goods orders fell by more than expected during the month, which could be a sign that business spending is starting to slow. This will be a busier week, with scheduled reports providing updates on consumer and manufacturer confidence, personal income, personal spending, and the March jobs report.

Brad here. As we talk about inflation (and we will have more to say next week), the real question for us, as investors, is what we should do with our portfolios. No one is more qualified to answer that question than Pete Essele, who runs our Preferred Portfolio Services^® Select asset management program. Here are his thoughts—have a great weekend!

We’ve talked a lot about higher interest rates and what they mean for the market. But we haven’t really looked at what is driving those higher interest rates, which is inflation. Of course, you see the stats and the headlines, but as usual, there is very little context or explanation as to what those numbers mean. Today, I want to take a look at what inflation actually is.

Brad here. Yesterday, I laid out why I am not concerned, in general, about what a yield curve inversion means for the economy, while still being very aware of the increasing risks. Today, Anu Gaggar is taking a more detailed look at what inversions have historically meant for the markets. Although she too sees rising risks, she is also less concerned in the short term—so let’s hope we are right!

One of the outcomes from the recent Fed meeting, where the Fed decided to raise rates for the first time in years, was a clear plan to continue to raise rates over the next year. Fed Chair Jerome Powell added fuel to the fire yesterday when he said that the Fed was willing to raise rates even faster than the meeting notes suggested. The Fed is now clearly focused on bringing inflation back down, even if it means slowing down the economy.

Last week was jam-packed with economic updates and reports that covered a variety of sectors. The February retail sales report was one of the more widely monitored updates, as it showed that consumer spending continued to grow during the month. But the pace of sales growth slowed compared to the start of the year. This will be a relatively quiet week, with only one major update scheduled.

This week, we have been talking about interest rates and the Fed—and what that all likely means for our investments going forward. But behind those conversations is another more fundamental question: what should interest rates be? If there is some natural rate where interest rates should be, that could give us some guidance as to where they will end up. That is really what we should be looking for as we plan our portfolios over the long term.

One of the things we know, mathematically, is that if interest rates go up, stocks should go down. If you consider a stock price as the discounted present value of a future earnings stream, then a higher discount rate results in a lower present value. There is no nuance or context; it is just math. So when rates are raised—and prospects for future raises are reinforced—and yet stocks move up, there is clearly something else going on.

With the regular meeting of the Fed this week, there was a great deal of speculation about what it would do. As expected, the Fed pulled the trigger on a 25 bp interest rate hike. But what will happen next? What I expect from the statement, as well as the press conference, is that there will be similar hikes at every meeting for the rest of the year (data permitting) and that quantitative easing bond purchases will be wound down by the end of the year. In other words, I expect the Fed to follow up the rate hike with signals that it will continue normalizing policy, and I don’t expect that to be derailed by the Ukraine war.

Today’s post is going to be a short one because there is simply too much uncertainty right now to make a principled argument about pretty much anything. Interest rates have bounced back up to levels above 2 percent. Will they stay there? Depends on what happens in Ukraine. Stocks are staying somewhat below, but not far below, where they were when the invasion started. Will they go up or down? Pretty much depends on what happens in Ukraine. Oil prices, consumer confidence, inflation, and so forth are all pretty much the same story. We are all waiting on events.

Several important economic updates were released last week, with a focus on international trade, consumer inflation, and consumer sentiment. The February consumer inflation report drew the most market attention, as it showed that inflationary pressure continued to rise. This will be a very busy week of updates with scheduled reports that will cover producer inflation, retail sales, the housing market, industrial production, and the March Fed meeting.

Have you experienced sticker shock at the pump recently? Chances are, you probably noticed a price hike the last time you topped off your tank. According to the Energy Information Administration, the price of conventional gasoline has risen 57 percent in the past year, and consumers are feeling the squeeze.

My colleague Sam Millette, manager, fixed income on Commonwealth’s Investment Management and Research team, has helped me put together this month’s Market Risk Update. Thanks for the assist, Sam!

My colleague Sam Millette, manager, fixed income on Commonwealth’s Investment Management and Research team, has helped me put together this month’s Economic Risk Factor Update. Thanks for the assist, Sam!

After a terrible January for the markets, February continued the decline, with fears about inflation and Fed rate increases dominating the start of the month, only to be superseded by the Russian invasion of Ukraine. Although the Covid-19 news continued to improve, by the end of the month, markets had moved on from medical risks to economic and geopolitical fears. Looking forward, those are the risks that are likely to dominate, as Covid-19, while still with us, has left both the headlines and, apparently, the markets.

Several important economic updates were released last week, with a focus on February’s business confidence and job reports. The job report showed that more jobs were added than expected during the month, which drove the unemployment rate to a new pandemic-era low. This will be another busy week of updates relating to international trade, consumer inflation, and consumer sentiment.

It’s possible that the autocratic regime in Russia didn’t fully appreciate the power of stakeholder capitalism. In the wake of the invasion, stakeholders have clearly chosen sides—and they do not include the Kremlin. Corporations have responded, and many have decided to sever Russian ties through divestment. Shell and BP recently announced their intention to abandon their involvement in Russia. Further, Sberbank (Russia's largest lender) says it is leaving the European banking market in the face of Western sanctions against Moscow.

A question I have been considering, and which recent events have made more urgent, is what retired investors (or those close to retirement) should be thinking as they look at the inflation figures. Is there something they should be doing? If so, what?

In recent posts, we’ve looked at both the fundamentals underlying market response to the Ukraine invasion, as well as the historical data around similar events. The conclusions were generally reassuring to us as investors. Today, though, I want to do something a bit different. Rather than consider the specifics and what they might mean, I want to ask more general questions. How should we be thinking about this? And can we use that to draw any conclusions around the likely next developments?

Markets were down across the board in February, with U.S. indices dropping between 3 percent and 4 percent, while international markets were down 2 percent to 3 percent. Still, markets bounced back a bit to end the month. The reasons for this were twofold: interest rates pulled back in the U.S. and the medical news continued to improve.