Market Conditions – 1st Quarter 2022 Outlook

The year started as a high for the S&P and is still high for the year.  The market has declined steadily over the first part of this year, with inflation being the primary concern.  Inflation reached a 30-year high matching the 1980s level.   The geopolitical issues were not to be outshined, and Russia Invading Ukraine increased the inflation concern.  The herd mentality in commodities results in similar energy inflations of 2008 as we headed into the Great Recession. Inflation is the main difference from the previous bought of inflation in the energy markets.  The other inflation was the housing market and how high yielding loans amounted to supply being artificially pushed up so that a segment of people could not afford the payments on those houses. 

Energy last time had a different tune with the fear of “Peak Oil.”  Market participants feared supplies running less as we entered a new age of lower oil supplies.  These fears were real, but now it is out of losing a supplier to the global demand.  My question is, which is it, are we past peak oil, or are we losing supplies from Russia?  No matter the facts and the outcome, there is only one group of people controlling our inflation in energy and only speak of these groups when there are extremes.  Speculators are the most common word for these market participants to find a theme and compound their interest by gaining a herd mentality.    The herd gathers and continues its march up the hill before reaching the top.  What stops this herd is always different, but there has always been a limit.  Today we have a real supply chain issue, and the increase in energy once again is coming at the worst time.    How can we stop the herd and reverse them back down the mountain?  Chart showing Oil prices.  During the recession, deflation was the last reason to stop the herd mentality.   World oil market chronology from 2003 - Wikipedia

What is the current market oil chart?

I see that deflation will always work to reverse these trends but does it always result in a recession?  I want to think that we can have a correction in energy and, therefore, inflation if we can find another way to increase supplies or decrease demand without losing economic output.  Today’s difference is that the housing market is stable, the banking sector has been ready for this for a decade, but war seems to be steady. 

Today’s supply chain issue is from the pandemic black swan event that has dominated the public sentiment.  The economy had to go through a forced recession to help save lives and come to a halt as everyone had to take two weeks off.  These obligatory stops in the industrial companies continued on and off for two years, which dislocated the supply chain and created shortages.  These shortages showed up from the beginning of the pandemic and are still showing up.  To catch up with the backlog of demand, there seems to be one issue from the toilet paper to the microchips: keeping workers working enough.   Is the workforce not able to work, or has there been a cultural shift to not working as hard?  So, we know that getting the next generation to work as hard as the last will not be the change needed to correct the supply chain.

As our leaders speak of a new world order of economic prosperity, I look to the labor force to see if their ideas are even possible.  To be more worldly or globalized is the same term to me, and I see that globalization is the only change that has some severe headwinds.  China is 28% of the total manufacturing output, and this nation knows it.  The Republic of China has been playing a 50 plus year-long game designed to raise their economies out of poverty and classified as a first-world developed nation.

Globalization started decades ago and is set the world in motion toward more human prosperity.  The next movement could be for the Chinese and Russians to join forces to ensure their nations are the most wealthy and powerful.  The Future is always unclear, but there is one sure thing.  Change is coming because it was already set in motion.  The next generation of technology is here. Our world will be different than it is today as China becomes more of a first-world economy. Wage increases and workforce changes are always more expensive to the consumer.   Does technology outpace these inflation worries, or are we destined for higher inflation for longer?  Does the pent-up demand last longer than a couple of years?  These questions need to be answered rather than looking at why we have inflation.  There is a reason we are pent up, and there is good evidence that economists are seeing recession as a given in the next year because of inflation.  I see that our demand will be so high that our earnings for service industries will keep us from a nasty recession or maybe no recession at all.  The main point is, can the workers supply these demands, and at this point, no.  So perhaps the world stops buying cars and campers and starts spending money again on experiences.   These areas have plenty of supply, and the demand for other goods will subside.  The world must move past the pandemic and start experiencing life again, or we will slow down as an economy, and recession will be the only remedy to cure high inflation. 

Gabriel Jones
AAM Fee-Only Financial Planning and Investment Advisory
May 10, 2022