The Independent Market Observer

What You Need to Know: Is Renewed Growth Ahead?

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on May 5, 2022 4:21:41 PM

and tagged Commentary

Leave a comment

What You Need to KnowOne of the key things I do as an analyst is figure out what can be safely ignored. In today’s environment, with so many “different this time” events going on—the pandemic, the Ukraine war, and the 40-year high in inflation—what can we safely disregard? Finding the right answer is not as simple as it was a couple of years ago.

That’s why I am going to start a semi-regular feature called, “What You Need to Know.” In each of these articles, I will highlight a few points important to understanding what will happen next. This will be the first of these features, in which I will focus on three main topics.

1) Pandemic Recovery

The first point is that the pandemic, from an economic standpoint, is over in the U.S. While reported case growth is up substantially, the country has largely abandoned restrictions, and they will not come back. The economy is open nationwide, people are shopping and traveling, and the domestic economic impact will be small going forward.

2) Supply Chain Disruptions

Point two is that this status quo is not the case elsewhere in the world, especially in China. This is not a medical story, but rather a supply chain one. The Covid-19 shutdowns are disrupting both production and transport, which will directly affect the U.S. As such, we have to evaluate this point differently, but the news is relatively good.

Remember, supply chain problems have been in place for a couple of years now, so companies have learned how to deal with them. The problems in the U.S. are largely solved, and the rerouting of supply chains for many products is well underway. These issues are likely to be less impactful than earlier supply chain snarls, and the damage will be less than currently feared.

3) Inflation Activity

This brings us to the final point: while inflation is high, it appears to be peaking. We can expect inflation at year-end to be below where we are now, and the outlook appears promising. The Fed, which raised interest rates yesterday by 50 basis points (one basis point is equal to 1/100th of 1 percent, or 0.01 percent), made a point of nearly ruling out larger increases and noted the strength of the economy. For financial markets, the prospect of lower inflation and a strong economy should provide a cushion for the current volatility. Conditions will initially decline, and then eventually get better, so we have the prospect of renewed growth ahead.

Despite Market Woes, Fundamentals Prevail

To reduce these three points to one key idea, I would say we’ve experienced a tremendous amount of bad news recently, but this outcome hasn’t been as bad as initially feared.

Right now, there is a great deal of bad news priced into the markets, but the fundamentals remain sound. The outlook seems to be improving in many areas, which will provide a cushion in the short term and opportunity in the medium and longer terms. Things are starting to get better, and that’s a good thing to know.


Subscribe via Email

Crash-Test Investing

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®