3 Key Areas Business Owners Should Watch

3 Key Areas Business Owners Should Watch

We are now almost halfway through 2022, and it is fair to say that a sense of worry has permeated the U.S. For one, price inflation has been and continues to be a problem, so much so that the Federal Reserve has shifted from its “transitory” label to a “persistence” label, which is not a positive sign. Two, war in Ukraine has broken out, with the prospect for a quick resolution unlikely. And finally on April 28, the Bureau of Economic Analysis released their first estimate on the economic growth and the number caught most people by surprise; real gross domestic product (GDP) decreased at an annual rate of 1.4 percent in the first quarter of 2022.

These are all signs that our economic condition has not returned to the normal conditions that we had hoped for in January. In fact, the economic outlook ⁠— while never crystal clear ⁠— seems even fuzzier and in worse shape today. However, we recognize that many of us are searching for some guidance on how to read the economic situation. In short, what factors should we pay particular attention to now, so that we can better understand and prepare for the risks that may lie ahead? Here are three key areas:

Watch the Federal Reserve

On April 12, the Labor Department issued their monthly report on the Consumer Price Index ⁠— a measure for what consumers pay for goods and services ⁠— and the report was not good. Domestic inflation jumped to a new 40-year high of 8.5 percent last month as compared to the same month a year ago. One should take note that this report only adds to the fact that rising prices have been unrelenting, with six straight months of inflation above 6 percent.

As a result of this persistent inflation problem, the Fed has pivoted to a profoundly hawkish tone this year. In their most recent press communications, Chairman Jerome Powell has identified two things to come: 1) interest rate increases; and 2) the draining of cash reserves from the financial system (quantitative tightening). Clearly, the Federal Reserve’s (Fed) more restrictive policy path has one purpose: to slow down demand in the economy in a manner that allows for domestic production to catch up with current consumption. This should lead to lower inflation pressures at both the production and retail levels of the economy. Can the Fed manage all of this without causing something bad to happen? Well, this may be the most important question today.

Watch the Bond Market

Over the first months of 2022, bond prices have been moving lower and volatility has been extreme. Why? As discussed, the Fed is now in play and their intentions are to raise interest rates. I would recommend that you pay attention to one key market signal: the relationship between short-term and long-term rates for U.S. treasuries.

  • The treasury yield curve graphically represents yields for bonds across a variety of maturities.
  • An inverted yield curve occurs when short-term treasuries have higher yields than long-term treasuries. A common analytic approach comes from a comparison of the 2-YR treasury yield versus the 10-YR treasury yield. When the 2-YR yield is higher, the curve has inverted.
  • An inverted yield curve is unusual; it reflects bond investors’ expectations for a decline in longer-term interest rates, typically associated with recessions.

The bottom line goes like this—an inversion in the treasury yield curve (short yields higher than long yields) is a reliable, bearish signal that the Fed has gone too far. In other words, they have pushed monetary conditions to a point that institutional investors are now bracing for a recession to come (shrinking economy).

Watch Developments with U.S. Companies

There are some important information bits that you can glean from the details that companies provide in their press releases. Here are two examples:

Supply-Chain Challenges

  • On April 29, Apple announced that it is expecting ongoing supply issues to continue to impact product sales in the second calendar quarter of 2022. In the first quarter, Apple had some difficulty meeting demand for the iPhone, iPad, and Mac due to supply constraints, and that is going to get worse in Q2 2022.
  • On April 29, Intel CEO Pat Gelsinger now expects the semiconductor industry to suffer supply shortages until 2024. The CEO told CNBC the extended timeline for the chip crunch is now due to a lack of manufacturing equipment.

Quarterly Earnings Reports

  • Reviewing the early results for Q1 that were released in April, S&P 500 companies have reported earnings growth in the range of 5.1% and revenue growth at 10.8%. Even better, Wall Street analysts have raised their full-year EPS and revenue growth projections to 10.2% and 9.3% respectively.
  • For investors, this trend in fundamentals is important and should provide the foundational support needed in the next recovery phase for stock prices. If we see earnings diminish over the course of 2022, this may be a huge sign that the economy is slowing down. Translation—costs will be eliminated and hiring may slow down. These are signs of a late business cycle or recession condition.

Conclusion

The pandemic has caused several major economic disruptions, many of which are still being felt today. For this reason, business owners should pay attention and focus on reading certain signals that could be expressed in the markets this year. Learning how to read and navigate the trends will be important in 2022.

Overall, this year may be harder to read, but it could also be more rewarding for those that can anticipate the risks as they appear.

 

Disclaimer: This is a general communication being provided for informational purposes only. It is not designed to be a recommendation for any specific investment product, strategy, plan feature, or other purposes. By receiving this communication, you agree with the intended purpose described above. Union Savings Bank and its’ representatives are not suggesting that the recipient or any other person take a specific course of action or any action at all. Prior to making any investment or financial decisions, an investor should seek individualized advice from personal financial, legal, tax, and other professionals that take into account all of the particular facts and circumstances of an investor’s own situation.

Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be appropriate for all investors.

Advangelists Pixel