A Turbulent First Quarter

by | Apr 5, 2022 | Inflation, Market Trends, Market Updates

Tilt-A-World, Roller Coaster, Bumper Cars, Double Shot. It seems like investors have been on amusement park rides.  It would be hard to find a three-month period in recent times with the dislocation, black swans, disruption, and general anxiety that we have experienced since the start of the year.


“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.”
― Sam Ewing (humorous)

The Consumer Price Index (CPI) rose to 7.9% year-over-year during the quarter.  This represents the highest CPI since January, 1982, and a .08% rise over January of this year.  Energy was the biggest culprit, rising 3.5% in February.  Since Russia’s invasion on February 24, crude prices have risen more than 30%. 

We have been anticipating this move for the last nine months. It was a predictable that after 18 months of Fed stimulus that prices would rise substantially.  Add to this the war in Ukraine.

Inflation, however, is hydra-headed.  Unemployment has been rapidly decreasing, creating higher wages.  Although average employment wage increases are approximately one-half of the rate of inflation, the costs of goods and services will eventually decline.  Wages, however, will remain the same.  Lifting Covid-19 restrictions in the U.S. has also contributed to inflation.  Maintaining Covid-19 restrictions in China, however, has closed numerous ports, contributing to shortages and higher prices. We expect inflation to end the year in the 4% – 5% range.

Be It Ever So Humble

The housing market reminds us of the Tower of Terror, an amusement park ride that moves at 6.3 Gs, as much as an astronaut experiences.  The housing market is often a litmus test for Fed interest rates and inflation.  They have caused a substantial increase in mortgage rates.  In the last three weeks mortgage rates have gone from 3.75% to 4.5%, the fastest increase since 1987.

There is little good news for new home buyers.  Housing prices are up 19% year-over-year and 11% the year before.  Do the math: in two years, home prices have increased 30%.  The cost of an average house has gone from $270,000 to $350,000 in the last two years. 

We see no reason why housing prices will revert to the mean in the near future.  Money accumulated by American households during the pandemic ($ 2 trillion) and a shortage of housing will keep prices in the 6.3 G range.

Renters are not faring any better. About one-third of the country are home renters.  Rental prices will have risen 15% at the end of the current quarter.

Not Happy Campers

It should come as no surprise that rising interest rates, higher mortgage rates; inflation; volatility; the surge in gas prices; and the war in Ukraine have dampened the spirit of the American consumer.  The University of Michigan Consumer Sentiment Index fell to 59.4 in March, the lowest reading since August 2011.  Most consumers complained of reduced living standards due to inflation.

Michigan Consumer Sentiment Index

The Michigan Index of Consumer Expectations, which focuses on how consumers view their personal financial situation now and into the near future, dropped precipitously from 59.40 in February to 54.30 in March.

These reading do not cause us to fall off our chairs.  American consumers and our country in general are going through a difficult time. 

Indexes — or is it Indices?

IHS Markit reported in March that its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, rebounded to a reading of 56.0 from 51.1 in January. It attributed the sharp rise to “employees returning from sick leave, increased traveling and greater availability of raw materials.” A reading above 50 indicates business expansion.

According to the Purchasing Managers’ Index (PMI), compiled by IHS Markit, the global economy expanded for the twentieth straight month in February as Covid 19 Omicron showed signs of weakening. The survey is compiled from 40 economies worldwide.

The Materials Price Index (MPI) fell 6.3% in mid-March.  Despite this ray of sunshine, commodity prices still sit above the previous all-time high of April 2011. Falling energy prices were largely responsible for the decline; however, energy prices will almost certainly remain high due to the war in Ukraine and global demand.  One of the hidden energy costs of the war is that air freight and ocean shipping now use longer routes to avoid conflict zones.

Service, Please

The Institute for Supply Management (ISM) reported that its non-manufacturing index rebounded to a reading of 58.3 in March up from a one-year low of 56.5 in February. This suggests that consumers, who have been focusing their spending on goods, may be turning their attention to services.  This change may be a reflection of lifting Covid-19 restrictions, encouraging airline travel, vacations, and dining out. A reading above 50 indicated expansion in the services sector.

The ISM’s measure of new orders received by services businesses rebounded to a reading of 60.1 from a 12-month low of 56.1 in February.

Its services industry employment gauge jumped to 54.0 after a February reading of 48.5 February.  This may be seen as ambivalent news, sinch higher employment generally leads to wage inflation.

Money Talks.  It Keeps Saying Good-Bye to Me

Federal Reserve chair Jerome Powell remains confident in the American economy.  He has stated that the economy is on a sound footing and will remain positive even with a series of interest rate increases. He believes that supply chain shortages will work themselves out over time and that the economy is “one that will be able to flourish in the face of less accommodative monetary policy.”  Inflation will recede, he averred, though not abruptly.

What Do Recessions Have To Do With Men’s Shorts

Everything, according to Allan Greenspan, former Fed chair.  Greenspan was never noted as a fashionista or, for that matter, an especially natty dresser.  He is, however, interested in men’s underwear as an economic indicator. Greenspan’s reasoning is that men’s shorts are a private garment, seen only perhaps by one’s golfing buddies. It is not subject to trends or fads; it is a staple of men’s clothing.  When sales of men’s underpants fall, it is a sign that men’s budgets are being crimped. 

He cites historical data.  According to the Men’s Underwear Index (MUI) – yes, it actually exists – men’s underwear sales fell significantly from 2007 to 2009, during the Great Recession.  Sales increased in 2010 as the economy improved.

According to our exhaustive research at Fortis, we believe men are continuing to buy underwear; thus, we are not predicting a recession.

What, Me Worry?

Market turbulence and volatility, of course, bring out the ambulance chasers.  They are quick to make Casandra-like predictions of a recession or stagflation.    This is life in the Fun House.  Long-term investors have experienced downturns.  Think of yourselves as “investors” and not “day traders.” Companies with strong balance sheets, who offer goods or services that consumers need, and have a reliable cash flow survive.

Silver Linings

This is, we believe, the time to invest in equities.  Many high-profile stocks have missed their earnings numbers and some of the air has been taken out of them.  One good outcome of a market selloff is that it removes excesses. Valuations are becoming reasonable, in some cases attractive.  We think the S&P and Dow will reward patient investors.  Despite a miserable start to the quarter, the S&P gained roughly 5% in March, which would be its best month since October 2021.

The carousel we have been on for the last three months has not been pleasant, perhaps even a little dizzying.  If you think back to your childhood, however, you were given the chance to grasp the brass ring, a symbol of prosperity.      

A Closing Thought For All Mothers on Mother’s Day

When you feel neglected, think of the female salmon, who lays 3,000,000 eggs but not one offspring visits her on Mother’s Day.

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