Broker Check

2022 Q1 Letter to Clients

April 13, 2022

April 13, 2022

Play Ball! It is so exciting to see the boys of summer back in the yard. It signals the start of spring with the promise of the warmth of summer and carries us right into the fall. The Giants even won their home opener in extra innings with a walk-off hit in the bottom of the 10th inning.

Q2 2022 - Economic and Market Commentary

America and the rest of the world are facing the confluence of three important and conflicting forces:

  1. A strong but slowing U.S. economy, which, we hope, has COVID-19 in its rearview mirror.
  2. The highest inflation in 40 years, which means rising interest rates and the reversal of quantitative easing (Q.E.).
  3. The war in Ukraine and the accompanying humanitarian crisis, with its impact on the global economy in the short term, as well as its significant impact on the geopolitics of the future.

These factors will have a meaningful effect on the economy over the next few years and on geopolitics for the next several decades.

U.S. Economy

The U.S. economy had a strong finish in 2021 as real incomes across the country rose with the $1.3 trillion the government paid out in transfer payments. Most of that money was spent within the economy. Hence, giving corporate America record sales and profits, 2 million people retired early, migrant workers dropped by 1 million, and available jobs skyrocketed to 11 million. However, job seekers dropped to 5 million, so there are not enough workers, especially skilled workers, to fill openings. Wages increased 5.9% last year, which is great, but that caused some difficulties for businesses who had to pay them. Housing prices surged during the pandemic and are just now starting to slow a little as interest rates rise. Asset prices have remained high as inflation soared over 7%. Clearly, some of this inflation is transitory, but some will be around longer because high wages, high housing costs, and higher energy prices will persist. These factors have continued into 2022, driving further growth and continued inflation.  

First quarter, things are beginning to slow down. Consumer confidence and consumer sentiment have fallen recently due to the ongoing fatigue from the pandemic and over-high inflation. After adjusting for inflation, consumer spending also fell -0.4% in February, and real spending has dropped three out of the last four months. In addition, the ISM US manufacturing index fell to an 18-month low in March mainly from a decline in new orders, but some caused by the supply chain getting worse and extending lead times.  

Inflation & Interest Rates

Since the economy has strengthened and moved past the pandemic recession, the Federal Reserve has decided the economy is strong. It's time to embark on a monetary tightening policy and take the punch bowl away. Massive stimulus was created during the pandemic crisis, so there is a lot to take away. The first step - is to stop quantitative easing, which is the Fed's purchase of $120 billion of treasury and mortgage bonds every month to keep interest rates low. These purchases stopped as of March 9th, 2022, and interest rates started to climb right on cue. The second step - begin hiking interest rates. They approved the first hike at the March meeting and plan to raise rates by 0.25% each meeting until inflation is under control. The third step - to a policy tightening would be to reduce the size of the federal reserve's balance sheet, which has inflated from $4 trillion to $9 trillion over the last two years, the most significant increase in history. 

Pre-Ukrainian crisis, we were staring down the barrel at a couple of Fed policy choices, wondering if they could turn into policy mistakes. The first choice- is that they could be tightening interest rates into an economic slowdown already underway, therefore increasing the risk of a recession. This is because economic activity peaked in November 2021 and has been slowing since. The second choice - they could back off the tough rate hike talk that they have been broadcasting for the last six months and get a bit more dovish. The consequence of this path is risking continued runaway inflation and letting inflation become embedded into the economy.     

And so, they are on a very, very narrow path to the proverbial economic soft landing. Fed chair Powell has said they are still on track for hiking rates as needed to quell inflation and are looking at two possibilities with a wide range of outcomes. Therefore, economic forecasting for this year has been so difficult because it all depends on the Fed's choices.  

The Fed states they will have to raise rates over 3.25%, a 300% change, to quell inflation. Historically, they have needed to drive the economy into recession to bring inflation down meaningfully. The last time we had rapidly rising inflation was in 1978. Paul Volcker became Fed Chairman when inflation had gone out of control. He began raising rates until they reached 20% and stopped inflation. His plan worked, but the consequence was putting the country into a 19-month recession. Many do not think Washington has the political will to accomplish that today. 

Ukraine Crisis & Knock-on Effects

When we look back at history to the Crimean War in the mid-1850s, Russia faced off against the West in Ukraine. Isn’t it amazing at how little things have changed over the past 170 years. The invasion of Ukraine by Russian forces is dominating today's headlines, and naturally, investors are wondering what impact this conflict may have on the stock market. In analyzing the situation, the current geopolitical crisis carries with it three important risks going forward:

  • Disruptions to the energy market and other commodity markets (e.g., fertilizer, grains, metals, etc.) could exacerbate the existing inflation problem in the U.S., putting significant upward pressure on the Fed's monetary policy decisions. Energy analysts estimate that reducing the Ukrainian/Russian oil & natural gas could cause a net 2 million barrels a day shortage of oil, which will keep global prices elevated. Food- the food situation could cause dire consequences for many, as Ukraine and Russia supply 1/5 of the world's wheat, among other crops. This will most likely cause food shortages in a number of countries that depend on them for grain and other agricultural products. The U.S. supply should not be affected, but food price will remain elevated. 
  • Fertilizer is another part of the coming food crisis as fertilizer takes natural gas to produce. Russia makes a large percentage of the world's fertilizer that is now in short supply. Many farmers in poorer countries cannot afford to pay the higher prices, so they go without, resulting in much lower crop yields at harvest, which compounds the problem.
  • Additionally, there is the negative impact that the conflict might have on consumers. With Consumer sentiment today already at a decade low, additional inflationary pressure and the possibility of a prolonged military conflict could cause consumers to scale back on spending, increasing the probability of an economic recession.  

Last week, the CEO of Restoration Hardware told analysts on the earnings call that foot traffic in their R.H. stores nationwide dropped noticeably as soon as the war began. He also reaffirmed that the inflation the nation is experiencing is real and is not going away quickly. He had just negotiated their ocean shipping contracts, and shipping costs remained elevated.  


The first quarter of 2022 has been volatile as the Fed's impact and rising interest rates are evaluated by market participants. We expect Q2 to be choppy as well. In the post-World War II era, bear markets have consistently led or coincided with peaks in business activity. Of course, the global political and economic disruptions by Russia's invasion of Ukraine add additional pressures. 

Philadelphia Fed's Patrick Harker stated that he sees the neutral interest rate, the level that neither stimulates nor constricts economic growth, at about 2.5%. We will see if they can fix inflation and get us back to neutral. Corporate earnings reports for Q1 and Q2 should begin showing declines in growth as they must compare against the record sales and profits of last year's $1.3 Trillion stimulus-fueled spending by consumers. We have taken a more defensive position in portfolios with a higher probability of a slowing U.S. and global economy. We are holding a little more cash than usual, waiting for better opportunities. Rising interest rates are negative for most stocks and bonds. However, some sectors manage well in this environment. We have re-allocated some growth assets that have done well over the last few years to value and dividend-paying sectors like Utilities and Real Estate Investments Trusts. Gold is another asset that does well in this environment. 

As often happens, the bond market decided not to wait for the Fed to start hiking rates and preemptively pushed rates up over 2%, an amount equal to eight rate hikes. Because of this, we do not expect rates to go much higher than they are now. If the Fed backs off its plan after 2-4 rate hikes, rates will decline, boosting interest-sensitive assets like bonds, utilities, and REITs. 

Sources: JP Morgan, 2021 annual report; Investech Research; ECRI Institute


SVWA Happenings:

After nearly 6 years, SVWA and Chris Duke have decided to part ways. We wish Chris all the best in his new endeavor and appreciate all Chris brought to the firm. We're even more excited about our future direction. We remain committed to our deep partnership with you and to provide you with the best possible experience. 

SAVE THE DATE! Please join SVWA for a San Jose Giants Patio Party on June 17, 2022, at 6:30 p.m., with fireworks show to follow. More information to come. We hope to see you there!


Personal Notes @ SVWA:

Tracy Lasecke - made a few trips to Arizona to visit Roberta's mom and spend some time with other friends and family. They also flew up to Seattle to visit daughter Jamie to help her get settled in her new townhome. They are very excited for the start of the baseball season.

Scott and Erin – spent some time up in Tahoe enjoying reading by the fire and snowshoeing with the dogs. Then came home and spent time getting the garden ready for spring.

Scott Yang - and his family got away for a nice ski trip to incline village and skied at Diamond Peak. Hoping for a good playoff run for the Golden State Warriors.

Monique Ruiz- enjoys adding more spices, grains, and flours to her cooking, replacing rice with couscous, quinoa, or bulger (grain), and adding a little turmeric in a morning smoothie for its natural benefits tapioca flour in Brazilian cheese bread and strawberry boba. 

LisaOzaki - made a goal this year to hike every trail at Almaden Quicksilver. She has completed about 70% of the 37 miles within 4 hikes. Also, she finally visited Alcatraz after living in the Bay area for 10 years. 

Charles Tran - enjoyed summer during the Winter when he traveled to Oahu, Hawaii. He ate excellent seafood, rode a moped from Waikiki to the east shore, and had a great time with friends. He's also repotted many of his houseplants in preparation for the growing season.


We trust you've found this review to be educational and helpful. If you have any questions or would like to discuss any matters, please feel free to give us a call.

As always, we are honored and humbled that you have given us the opportunity to serve as your financial advisor.

Gratefully yours,

The Silicon Valley Wealth Advisors Team

Tracy Lasecke, CFP®            Scott Yang, CPA, CFP®          Scott Ponder, MBA, CFP®

Monique Ruiz                                     Lisa Ozaki                               Charles Tran



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