Friday, Mar 18th 2022

The Macro: Stocks, Gas, and Hikes

Commentary

The below content and projections are the opinion of the authors. Any conclusions or takeaways are their own. This should not be considered as investment advice. Investing involves the risk of loss and returns are not guaranteed.

Three things this week —

1/ The stock market. Through the close on March 14, the S&P 500 was enduring its fourth-worst start to a year on record, according to Bespoke Investment Group. The benchmark index had dropped 12.2% through the first 50 trading sessions of 2022, a decline only exceeded over the same period in 2020, 2009, and 1935. And then over the next three days, the S&P 500 gained 5.1%, the most for a three-day run since November 2020. The S&P 500 is, as traders might say, starting to “act better.” At least it’s a start.

2/ The password is not “Password.” If you gave us ten guesses at our Netflix password, we can assure you we’d end up locked out of our account. This would also lock an indeterminate number of other people out of our account as well. Which Netflix is not thrilled about. Users in Costa Rica, Peru, and Chile will soon get to “test” a new “feature” that limits how widely a Netflix password can be shared outside of a single household. The business angle here is straightforward, as we wrote this week — Netflix has transitioned from growing users to more aggressively monetizing them. This new initiative also brings to mind stories about the cable company sending cease and desist letters because of all the illegal music a friend had downloaded to the family computer. A reminder that just as we don’t own the internet connection in our home, neither do we own our Netflix account: terms & conditions apply.

3/ Gassed up fuel costs. Uber, Lyft, DoorDash, and Grubhub have all implemented some sort of program to help drivers offset fuel costs. An initial thought is that these programs could set the table for permanently higher fees if demand holds up as new cost structures are rolled out. And this may well come to pass. But these developments also illustrate how the balance of power in the industry has changed. Raising fees for customers to alleviate strain on drivers you’re trying to keep satisfied is a far cry from the millennial subsidy economy these companies helped shape.

Two predictions for the U.S. economy —

Officials at the Federal Reserve offered updated forecasts this week about what they think will happen in the U.S. economy over the next few years.

And two predictions piqued our interest.

First, Fed officials think inflation will be at 4.3% at the end of this year.

This suggests we’ll see a slowdown in price increases over the balance of this year, a welcome development after last month’s data showed a 7.9% jump in inflation. But this forecast is also a huge shift from what the Fed was thinking just three months ago, when officials predicted inflation would be running at 2.6% at the end of this year.

That kind of shift in expectations presents a few more questions than answers.

Second, the Fed does not believe its interest rate plans will cause a commensurate rise in unemployment.

Projections published on Wednesday show the Fed expects to raise rates 6 more times this year and 3 times next year. Meanwhile, the unemployment rate – which stood at 3.8% in February – is forecast to fall to 3.6% at the end of this year and remain at this same level through 2023.

Now, an easy way to cool consumer demand is to create unemployment. Asked about this on Wednesday, the Fed chair suggested a slowdown in wage growth, not a loss of jobs, will enable the central bank to thread this policy needle.

“[As] we raise interest rates, that should gradually slow down demand for the interest-sensitive parts of the economy,” Powel said. “And so what we would see is demand slowing down but just enough so that it's a better match with supply. And that brings – that will bring inflation down over time. That's our plan.”

Though as Powell said himself — “[The] reality is there are many, many moving pieces; and we don't know what will actually happen.”

One thought for the weekend —

On Wednesday, the Federal Reserve raised interest rates for the first time since 2018.

On Thursday, the average rate on a 30-year fixed mortgage rose above 4% for the first time since 2019.

When folks wonder why interest rates, financial markets, and Fed policy matter for the general public, this is why.

As we noted a few weeks back in this space, the additional monthly cost for a mortgage that rises from the December 2020 low of 2.65% to 4% today could be $220 for the owner of a $375,000 home. Over the life of this borrower’s loan, you’re looking at nearly $80,000 in additional payments.

Over the last 15 months mortgage rates have been trending higher. Since the bottom in January 2021, the average 30-year fixed rate has risen from 2.65% to 4.16%. Eagle-eyed readers will note that this 1.5% increase is larger than the 0.25% interest rate increase announced on Wednesday.

And we think this serves as a good illustration for everyday borrowers of the idea professional investors might, at times, find too trite to say out loud — which is that markets don’t really trade based on what is happening now, but rather on what investors expect will happen next.

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