Q1 2022 Economic & Market Overview
Heading into 2022, we were cautiously optimistic about the economy and the markets in general. With the health impacts of the pandemic trailing off in the U.S. as a result of high vaccination rates and relatively milder symptoms in the currently dominant strains, the country’s economy had mostly reopened. As the economy reopened, growth was expected to be well above pre-pandemic levels. The switch from a stay-at-home economy to a more normal one was expected to alleviate inflation as the year progressed due to a few reasons. Firstly, the move back to a more normal economy would cause demand for goods to become less concentrated, thereby alleviating pricing pressure on essential goods. In other words, as the economy returns to normal, demand would be spread across more different types of goods, rather than just a few goods that were essential during the pandemic. Secondly, the return to pre-pandemic economy would help to restore the distorted supply chain. Furthermore, the outlook for corporate earnings growth remained robust in Q1. That said, however, there are some concerning factors that we will continuously monitor, including inflation, interest rates, and international factors.
In late February, Russia began its invasion of Ukraine. The invasion has caused a partial damper on this rosy economic view. Many believe there are various motivations behind the invasion, including to restore Russia’s once expansive dominance in Eastern Europe, as well as access to the Black Sea. However, none could reasonably dispute that control of the natural gas in the Donbas region of Ukraine was one of the most significant factors that prompted the invasion. Donbas contains one of Europe’s largest natural gas reserves, and still remains largely untapped due to the high cost of extraction. However, Russia, who is the dominant player in European natural resources, would have no problem extracting those resources and adding them to its assets. Regardless of how the war may end, the invasion will no doubt create turmoil in Europe for years to come. NATO already has and will likely continue to implement sanctions against Russia, but it is unlike NATO will enter the conflict directly as long as the battles are contained outside of NATO countries. The sanctions by NATO and other partners will likely disrupt Russia’s oil exports and drive up fuel costs, as well as disrupt the European economy as a whole.
Inflation in the U.S. seems to be more persistent than President Biden’s administration had anticipated and has by now become the spotlight economic concern. There are no signs of inflation easing in the short term. The U.S. federal reserve, looking to combat the persistent inflation, has begun aggressively raising the federal funds target rate at a faster pace, and to a higher level than previously forecasted. While rates were reduced to near zero during the pandemic, many analysts believe the target rate would be raised to a range of 2-3% during 2022.
The federal reserve is seeking to maintain a good balance between rate hikes, inflation, and economic growth. The agency must increase interest rates sufficiently to combat inflation and the overheating economy, but if this were done too quickly, it may halt economic advances and drive the country into a recession. Or worse, if the rate hikes cool the economy substantially, but do not have enough of an impact on lowering inflation, then the country may fall into a stagflation (a period of economic stagnation coupled with high inflation) similar to the 1970’s, which is far worse than the current environment of high inflation coupled with economic growth.
Despite the concerning factors, the revised outlook by most analysts as of the end of Q1 2022 is not all bad. The U.S. economy is expected to grow robustly as are corporate earnings.
Data Sources: CBRE Research, CBRE Econometric Advisors, CoStar Realty Information Inc., Bloomberg, Zillow Group, Redfin
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