Notes on the Week Ahead

In any given year, four big exogenous forces tend to have the most impact on portfolio returns, namely, earnings, interest rates, taxes and the dollar.  While the tax environment appears to be stable, in all other respects, 2022 is shaping up to be a difficult year with slowing earnings growth and fast-rising interest rates.  In addition, the dollar has risen significantly so far this year, as it did in 2021 and this is having negative impacts on both portfolio returns and economic growth. 

For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

Economic data in the week ahead should highlight a stumble in economic growth and a surge in inflation in the first quarter. While second quarter numbers will likely partly offset both of these trends, they will remind investors of the challenges faced by the Federal Reserve in trying to return the economy to a path of steady growth and moderate inflation. While some Fed officials have advocated very aggressive tightening, both the likelihood of near-term moderation in growth and inflation and longer-run disinflationary forces suggest it would be wiser for the Fed to take a slow and steady approach in battling inflation.

For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

A number of years ago, as part of a team-building exercise at an overseas conference, I got bullied into taking a ride on a particularly fearsome roller coaster. For someone who suffers from vertigo and is an admitted control freak, the next 90 seconds were not pleasant. Once the ride stopped, I stumbled out of the contraption. However, I could not proceed with our merry band of team-builders until I had done a serious inventory of the state of the world, starting with some rather fundamental questions.

For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

Last Thursday, as I headed home from a conference, the car I’d booked to take me to the airport didn’t show up. Luckily there was a taxi nearby so I hopped in and discovered that, in addition to a comfortable ride to my destination, the fare entitled me to a free lecture on the state of the labor market. “The reason your car didn’t show up”, opined the retired police sergeant at the wheel, “is you can’t find drivers anymore. It’s the millennials - they just don’t want to work”.

For additional insights from Dr. David Kelly, listen to the Insights Now podcast

Despite their best intentions, the Federal Reserve sometimes appears to be trying to steer a big boat, through violent rapids, armed only with a small paddle. The reality is that forces well beyond their control will mostly determine the fate of the economy. However, the energy with which they paddle could have a major impact on investments.

For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

At 5:30AM on Saturday morning, Coach Jack posted on the team Facebook page – the training run was a go.  Just as well.

The Boston Marathon is now five weeks away and as a proud member of the gasping geezers division of the Dana-Farber Marathon Challenge team, I knew we needed to get in a long run.  Between Covid and the weather, training has not exactly been easy.  On Saturday, the forecast was for rain with the possibility of torrential downpours.  But getting wet on Saturday was a better choice than waiting any longer for ideal training conditions.  Sometimes, despite adverse conditions and uncertainty, you just have to get going.

For additional insights from Dr. David Kelly, listen to the Insights Now podcast

In the week ahead, the world’s attention will continue to be focused on the horrific human consequences of the Russian invasion of Ukraine.  However, American investors will also be considering what it means for financial assets.  While the most severe economic consequences will likely be felt in Europe, the most important effects on U.S. portfolios depend on the implications of Ukraine for the U.S. economy.

Every winter, here in eastern Massachusetts, we are visited by Nor’easters. Each storm is plotted on weather maps days in advance. A low pressure area swoops down from the Rockies, gathers moisture in the Gulf of Mexico, rides up the east coast over the warm waters of the Gulf Stream and then stalls in the Gulf of Maine, churning itself into its full intensity. Every storm has the potential to turn into a blizzard. But whether it does or not depends on two things: First, what is the exact track of the center of the storm and second, how much cold air is in place before the storm arrives?

For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

Financial markets sold off last week as investors worried about a possible Russian invasion of Ukraine.  Before engaging in any analysis of what this could mean for long-term investors, three broad points are worth emphasizing.

So far this year, the 10-year Treasury yield has risen from 1.52% to 1.93%.  This increase has been accompanied by broadly lower equity markets, with value outperforming growth and international stocks outpacing their U.S. counterparts.