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There Is a Lot of Uncertainty in Financial Markets – and Markets Hate Uncertainty.

In recent weeks, economic and financial market data have been telling different stories – and that makes it tough for investors to know where the United States economy is headed. Since stock markets move up and down based on what investors think will happen in the future, markets have been volatile. Here are some of the issues that have contributed to recent uncertainty. Is economic growth slowing? At the end of April, the advance estimate for the gross domestic product (GDP), which is a measure of economic growth, showed the U.S. economy contracted (-1.4 percent, annualized) during the first quarter of 2022. It was a puzzling piece of information because consumer spending, which accounts for more than two-thirds of economic activity rose by 2.7 percent during the period – after being adjusted for inflation – which suggests the economy is strong. A discrepancy between imports (up) and exports (down) appeared to be the driver behind the decline in GDP. A contraction can be a sign that the economy is weakening. Is economic growth continuing? Right now, workers are in demand, which can be a sign of economic growth. Last week’s unemployment report showed stronger-than-expected job growth in April. The unemployment rate was 3.6 percent, and average hourly earnings rose by 5.5 percent, annualized. However, the labor force participation rate – th

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Correction and Contraction....

Investing during 2022 has been like running a forest trail and having unexpected obstacles appear every so often – a fallen tree, a swarm of biting flies, a bear with cubs – you get the idea. To date, economic, coronavirus-related, and geopolitical events have taken a toll on stock and bond markets, as well as the U.S. economy. For example: Prices were high as we entered the year and have continued to rise. Last week, the Personal Consumption Expenditures Price Index, a broad gauge of inflation across the United States, reported that inflation was 6.6 percent in March 2022, up from 5.8 percent in December 2021. The Russia-Ukraine War is pushing inflation higher. Russia and Ukraine are major exporters of energy and agriculture products, and exports have been limited by the war. Consequently, the World Bank’s Commodity Market Outlook forecasts that energy prices will rise by 50.5 percent and non-energy prices by 19.2 percent this year before moving lower again in 2023. China is locking down cities to fight a surge of COVID-19 and snarling supply chains. “Ships have been piling up outside Shanghai, the world’s largest port, and other container docks across China as authorities have forced multiple cities into lockdown to counter the country’s worst COVID outbreak since the pandemic began,” reported Eamon Barrett of Fortune. Cross-border restrictions on trucking have also created issues. The Federal Reserve began raising the fed funds rate to address inflation. The Fed is expected to raise rates significantly this year as it works to reduce demand and lower inflation. When interest rates move higher, the cost of borrowing increases, and economic activity slows. As a result, some investors are concerned about the possibility of a recession. Recession fears were top-of-mind last week when the Bureau of Economic Analysis reported that U.S. gross domestic product (GDP) – the value of all goods and services produced in the country – contracted 1.4 percent during the first quarter of 2022. Greg Daco, the chief economist of EY-Parthenon, wrote in Barron’s:

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TALKING ABOUT INFLATION

Here’s a riddle: How can inflation be 8.5 percent and 6.5 percent at the same time? The answer is that it depends on how you measure it. Determining how quickly prices are rising or falling – and where they may be headed in the future – is not simple. In the United States, millions of goods and services are bought and sold every day – shelter, food, transportation, energy, water, education, childcare, equipment and tools, medical care, furnishings, apparel, trash removal, and much more. The government relies on two indexes: the Consumer Price index (CPI) and the Personal Consumption Expenditures Index (PCE). Each index has two versions: headline inflation and core inflation. Last week, the Bureau of Labor Statistics (BLS) reported that CPI headline inflation was up 8.5 percent in March, and CPI core inflation was up 6.5 percent. The BLS does not collect every price in every part of the United States. It gathers prices in 75 cities, collecting data from about 6,000 households and 22,000 department stores, supermarkets, hospitals, gas stations, and other establishments. So, the CPI is a measurement that reflects the experience of urban consumers.

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THE FIRST QUARTER OF 2022 IS A WRAP, HERE'S A RECAP.

The first quarter of 2022 was jam-packed with volatility-inducing events: rising inflation, the war in Ukraine, rising interest rates, sanctions on Russia, and a new COVID-19 outbreak in China. Here’s a brief review of what happened during: Inflation continued to rise. At the start of the year, consumers and investors were primarily concerned about inflation. In February, the Personal Consumption Expenditures Price Index showed core inflation, which excludes volatile food and energy prices, was up 5.4 percent year-over-year. That’s well above the Federal Reserve (Fed)’s two percent target for inflation. The Fed began to tighten monetary policy late in 2021 by curtailing its bond-buying program. Investors expected the Fed to continue fighting inflation in 2022 by raising the federal funds target rate. Raising rates makes borrowing more expensive, which causes consumer and business spending to slow, demand for goods and services to drop, and prices to move lower, reported Carmen Reinicke of CNBC.

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Checking In On The Federal Reserve

Among other things, Congress asks the Federal Reserve to use its tools to promote price stability and maximum employment. Last week, economic data provided information about both. Inflation continued to increase Price stability means ensuring the prices of goods and services increase at a slow and stable pace. Last week, the Bureau of Economic Analysis reported that consumer prices rose 5.4 percent, year-over-year in February, excluding food and energy. When food and energy were included, inflation increased by 6.4 percent. Personal income increased, too, but not quite as quickly as inflation did. The Fed’s target for inflation is 2 percent. To bring inflation into line, the Fed has begun tightening monetary policy. So far, it has ended asset purchases and started raising the federal funds target rate. Next, it will begin to shrink its balance sheet. However, the war in Ukraine and a new COVID-19 outbreak in China are complicating the Fed’s inflation calculations.

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Markets Were Reassured By The Federal Open Market Committee (FOMC)’s Actions Last Week.

The FOMC met on March 16 and did exactly what most people expected them to do. They raised the federal funds target rate by a quarter point. Federal Reserve Chair Jerome Powell said the Fed expects to continue to raise rates and reduce its balance sheet during 2022 to lower inflation. The bond market appeared to give the Fed a vote of confidence. The yield on the two-year UST, which is the maturity that’s most sensitive to expectations for future rate hikes, rose from 1.75 percent at the end of last week to 1.97 percent. The yield on the benchmark 10-year UST also increased, but not by as much. Randall Forsyth of Barron’s reported, “…moves in the Treasury market add up to a marked flattening in the slope of the yield curve, a classic signal the market foresees a slowing of real growth along with an eventual diminution of inflation pressures.” In an ideal circumstance, the Fed would engineer a “soft landing” by pushing demand for goods down just enough to quash inflation without causing the U.S. economy going into recession. However, the Putin effect is making the Fed’s job harder. Fed Chair Powell stated:

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