This week marks an important moment for the stock market as companies begin to report their Q1 earnings. With America beginning to open following pandemic restrictions, there is a lot of optimism surrounding this quarter. However, rising interest rates may put a damper on this enthusiasm. The market is still holding its breath as the war in Ukraine is still active. This is sure to be an interesting quarter which begins with Q1 earnings reports this week.

As discussed last month, when stocks tumbled due to the war in Ukraine escalating, it’s important to review your portfolio and understand that investors shouldn’t sacrifice long-term gains for short-term volatility. This is easier said than done, but it’s important to remember that the market will eventually recover.

The chart below shows the major index’s returns at the month-end, and you can see that although they are down YTD, March saw an increase across the board as investors are hopeful for a positive earnings season and successful peace talks in Europe.

Inflation & Expected Interest Rate Hikes

The February inflation rate in the US accelerated to 7.9%, the highest since January of 1982, matching market expectations as expected energy remains the most significant contributor (25.6% vs. 27% in January), with gasoline prices surging 38% (40% in January). Additionally, inflation increased for shelter (4.7%) and food prices (7.9%, the most since July 1981). The March data was released today showing an 8.5% increase year over year. After stripping out gas and food prices, inflation still sits at 6.5%.

To curb inflation, the Federal Reserve will almost certainly continue to raise interest rates. Many economists forecast an aggressive “catch-up” from the Fed with up to six rate hikes between 25-50 BPS. Doing so makes it more expensive for businesses to borrow money, leading to slower growth in the economy overall.

A slower economy typically results in less inflation due to less demand for goods and services. In addition, citizens may be discouraged from borrowing money for big-ticket items when interest rates are high, leading to even less inflationary pressure. Thus, while higher interest rates may be tough on consumers in the short run, they can be beneficial in terms of curbing inflationary pressures. It’s important to remember that consumers have been used to low borrowing rates for many years, so an aggressive hike may alter buying behavior in the short to medium term.

A Walk Down Memory Lane – ARKK vs. NASDAQ during the Bubble

The .com bubble was a period of speculative investing in the late 1990s that led to a dramatic increase in the prices of Internet-related stocks. Most of these companies were unprofitable and had no revenue, but they nonetheless attracted investors eager to cash in on the growth of the Internet. The bubble reached its peak in March 2000, when the NASDAQ composite index reached an all-time high. By that time, many dot-coms were overvalued and facing mounting debts. The bubble burst in April 2000, and prices began to tumble. Over the next two years, the NASDAQ fell by 78%, causing investors billions of dollars in losses.

Cathie Wood’s ARKK ETF has been one of the most popular investment vehicles in recent years, thanks mainly to its focus on pandemic-era stocks like Zoom. However, the fund’s performance has been negative for the last couple of quarters, as investors have started to move away from high-growth tech stocks and into more value-oriented names. Wood remains bullish on the fund’s long-term prospects despite this recent underperformance, arguing that the current market environment is “ripe for innovation.”

The chart below compares NASDAQ’s chart during the end of the .com bubble and ARKK’s performance since its all-time high in February of 2021. Although they are not completely correlated, they may be following a similar pattern of tracking the “hype” of trendy investments before heading into correction territory.

News at Lake Street

We are excited to announce that Lake Street’s very own, Justin M. Terzo, CPA, has been named to the 2022 Forbes Best-In-State Wealth Advisors list! This year, Justin is ranked 29th in Chicago and it is his 3rd time receiving this recognition to the list.

The recipients of this award predominately consist of big bank and wire house advisors which leaves Justin as one of a few advisors that works at an independent firm to be given this award. Congrats to Justin for all his hard work and client dedication!

Articles We’re Reading

Homebuyers beware: Wall Street predicts a barrage of mega interest-rate hikes just as mortgage costs begin to soar…(link)

Elon skips his board seat … (link)

Blackstone Says Alternative Assets Are Headed for Your 401(k) .… (link)

Goldman – Is the 60/40 Dead? … (link)

Market Snapshot

For the Month Ending 3/31/2022 (Cumulative Returns)1

1Source – Morningstar, Inc. Corporate Bonds is presented as the iShares iBoxx $ Investment Grade Corporate Bond ETF. Municipal Bonds is presented as the iShares National Municipal Bond ETF. High Yield Bonds is presented as the iShares iBoxx $ High Yield Corporate Bond ETF. 10 Year Treasury refers to the valuation of a 10 Year Treasury Note, a debt obligation issued by the U.S. Department of the Treasury. Fed Funds Target represents upper limit of the federal funds target range established by the Federal Open Market Committee. Inflation Rate provided for the purposes of this report by the U.S. Bureau of Labor Statistics. Unemployment Rate calculated by the U.S. Bureau of Labor Statistics. WTI Crude Oil refers to the price of a barrel of West Texas Intermediate NYMEX) Crude Oil. Gold – Spot Price relates to the valuation of an ounce of gold, as traded on the NYSE Arca Exchange. U.S. Dollar refers to the U.S. Dollar Index (DXY). All Returns are denominated in USD (United States Dollar), unless otherwise explicitly noted.

Did You Know?

Do you remember when Berenstain Bears were spelled with an e? What about when you first read The Lion, The Witch, and The Wardrobe – was it Aslan or Azlan? These are just a couple of examples of the Mandela Effect, where a group of people shares a false memory. The Mandela effect is a term used to describe the phenomenon of large groups of people sharing false memories.

The term was coined in 2010 after a significant number of people incorrectly remembered that Nelson Mandela had died in prison in the 1980s. In reality, Mandela was released from prison in 1990 and went on to become the President of South Africa. However, the false memory is so widespread that it has come to be known as the Mandela effect.

While there are many theories about how the Mandela Effect works, one thing is for sure – it’s fascinating! If you’re curious about this phenomenon, see if you can find other examples in your life. You may be surprised at what you discover.

Presented by the Investment Committee of Lake Street, an SEC Registered Investment Adviser

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.