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April 2022

Market Update: Risks Rising to Virtuous Cycle between Corporations and Consumers

Key Points


Risks Rise from Tightening Fed, Slowing Global Growth


Advantages of US Economy Drive Asset Allocation


Uncertain Times Require Vigilance, Adaptability

For some time we have felt that the secular strength in the US economy would offset high levels of inflation during the first half of the year and drive growth into 2023. Rising corporate profits have led businesses to increase investment and hiring, which is supporting spending by consumers and, in turn, further profit growth. While this remains our base case, we now see risks rising to a continuation of the virtuous cycle between corporations and consumers, especially from a more hawkish Fed and slowing economic growth on a global basis.

So what are the primary areas we are keeping our eyes on that could cause us to shift our economic outlook and portfolio positioning?


High on our list are further disruptions to global commodity supplies from the Russian-Ukraine conflict that could exacerbate already high inflation here at home (see CRB Commodities Index chart). In addition to uncertainty on oil prices, upward pressure on food prices is increasing in probability as a result of likely interruptions to the spring planting season in Ukraine and rising prices of fertilizer due to the high price of oil. Unlike oil, agricultural products do not have a high level of potential extra reserves to fall back on. While Europe has significantly more commodity exposure to the Ukraine crisis, the US is not completely immune given the global nature of the commodities market and that spending on food in the US is a higher percentage of GDP than energy.

Another risk to our inflation forecast comes from China’s latest bout with COVID-19, which is not only hurting domestic economic activity in that country, but will negatively impact the global supply chain at a time when things were just starting to improve. Should these risks materialize and inflation not trend lower, it would increase the challenge for Fed officials trying to get inflation under control. Relatedly, we are watching closely to see whether cyclical pressure from Ukraine and China become secular trends. Will national security responses to both the Ukraine crisis and China’s COVID-19 outbreak lead to more de-globalization, with investment in domestic markets further increasing demand for labor?

The relative advantages the US economy enjoys versus other regions of the world remain foundational to our asset allocation. In equities, this view supports our emphasis on US high-quality companies selling at reasonable prices that can both continue to grow earnings and dividends at an above average pace, and that also have durable franchises and strong management teams to weather a recession should one occur. The strength in the US economy should also minimize credit risks in both the corporate and municipal fixed income markets across the yield spectrum. However, because the outlook beyond the first half of 2023 is increasingly clouded, we have broadened our range of potential outcomes from normal growth, to slower and a milder recession. As stewards of capital we remain vigilant during these uncertain times and are prepared to adjust course should the risks to the outlook described above materialize, or should another exogenous shock occur that would negatively impact the virtuous cycle that exists with corporations and consumers.



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