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What Speed & Not So Fast — Week of February 21, 2022

Tanks roll in Ukraine; investor battleground is the Fed’s war on inflation.

Strategy and Positioning written by Steve Orr, Chief Investment Officer; and Essential Economics written by Mark Frears, Investment Advisor

index wtd ytd 1-year 3-year 5-year index level
S&P 500 Index -1.52 -8.57 12.68 18.09 15.14 4,348.87
Dow Jones Industrial Average -1.77 -5.97 10.24 11.98 13.03 34,079.18
Russell 2000 Small Cap -1.00 -10.42 -8.54 9.80 8.85 2,009.33
NASDAQ Composite -1.73 -13.32 -1.62 22.98 19.49 13,548.07
MSCI Europe, Australasia & Far East -0.95 -3.29 4.42 9.96 8.48 2,256.56
MSCI Emerging Markets 0.21 0.95 -10.70 9.01 8.56 1,242.92
Barclays U.S. Aggregate Bond Index -0.42 -3.85 -3.90 3.00 2.67 2,264.43
Merrill Lynch Intermediate Municipal -0.32 -3.48 -2.91 2.56 2.86 308.98

As of market close February 18, 2022. Returns in percent.

 Strategy & Positioning 

 — Steve Orr 


  • War drums louder — beat the weather 
  • This is a time correction — most of the price changes are likely over
  • Retail and home sales strong
  • Rising tensions benefit Putin

What Speed

Good earnings, an economy growing above trend and easy money are not enough to make traders happy. What is ailing markets? Mounting tensions over the last two weeks about what Russia may or may not do have weighed on markets. Oil and gold are telling you traders are somewhat nervous about a possible conflict. 

Just as important, the economy is slowing from the last year and a half recovery but will grow above trend this year and next. The current correction is largely a product of uncertainty around how the Fed will act in the coming months. From the moment the Fed cut rates to zero at the beginning of the pandemic, traders knew the day would come when the Fed would begin to raise short-term rates. That date is March 16 at the end of the next regularly scheduled FOMC meeting. The question remains at what speed, and how far the Fed will raise rates and reduce its balance sheet. 

The tech-heavy NASDAQ and S&P 500 indices have borne the brunt of selling in this correction. Corrections can take place in price and time. We think a lot of the price move is complete. Time will be at least through March 16. The 99 corrections since 1928 recorded by Ned Davis Research have lasted an average of 100 trading days. That is roughly four months. If history rhymes, as Mark Twain believes, then those 99 cases imply a bottoming process that lasts into early summer. A sideways time consolidation until June would certainly fit the typical mid-term election pattern of a bumpy winter and rebound in late summer. Let’s get on with it. 

Throttle Down

Fed Funds futures are fairly accurate in predicting the Fed’s moves very close to the meeting date. At a month away, a lot can change. Witness last week’s action in the futures pits. From a 38% chance of half of one percent increase on Monday, traders throttled probabilities up to a near certainty by Thursday. Friday’s Ukraine flight-to-quality trade pushed interest rates lower, taking chances of a half point increase down to 21.5%. Like stock corrections, we are marking time for the Fed meeting. Pay attention to Fed Futures the week before the meeting. 

Four and Oh

And what of the Ukraine situation? As we went to press last Friday, Putin appeared to be winning all four fronts. Militarily, Russian forces were massed at four different border points, effectively surrounding the country. Front One, however, is global oil prices. Any “war premium” in the price of Brent crude goes straight into the Russian government’s coffers. Oil revenues make up 45% of the Russian budget. Front Two is the Nord Stream 2 pipeline. This natural gas pipeline would route Russian gas to Germany through the Baltic Sea. Russia does not necessarily need the pipeline, but Europe needs Russian gas that flows through, yep, Ukraine. 

Front Three is the future government in the Donbas region. If Putin hangs around long enough, he can negotiate a puppet government that will let him have free reign in the Black Sea down to his new possession, Crimea. Front Four is NATO and the European Union. Keeping a Russian border state like Ukraine from joining NATO is a key “safety” strategy for Putin. The centuries of invaders from the West feature large in the memory of Russians. Putin plays to this to restore a Stalin “buffer.” One must remember, too, that when the Soviet Union broke up, Russia lost half of its GDP from these smaller states. The point we made in an earlier note is that once markets look ahead a year or two, they discount the various outcomes and return their focus to corporate earnings.

 Essential Economics

 — Mark Frears


Not So Fast 

Recently we went up to visit my son and his wife in Fayetteville, Arkansas. A litmus test for personality is how you act behind the wheel. We all know the cutting in and out drivers, trying to get ahead regardless of what others are doing. The slower, methodical drivers stick to their plan, moving to the left to pass, and then back over into the right lane at a little over the speed limit. The third type is unsure; mostly you see them in the left-hand lane going five miles per hour under the speed limit. What type are you?! How fast is the U.S. economy going?  


Some parts of the economy appear to be doing pretty good, zipping along. Retail Sales for the month of January came in at a 3.8% monthly increase, much better than the 1.8% expected and the strongest since March 2021. The consumer balance sheet is in great shape. COVID savings were used to pay down debt and increase savings. Consumer spending makes up two-thirds of Gross Domestic Product (GDP), and as COVID restrictions continue to abate, there is room for continued strength in retail sales. 

Wages are growing, partly due to the scarcity of available, quality workers. The Atlanta Fed Wage Growth Tracker showed annual growth of 5.1% last month, the highest growth since August 2001. Based on historical data, this series has not peaked yet. 

Housing has been a hot sector for the economy even through COVID. Pent-up demand, lack of supply, and upbeat homebuilder sentiment support continued strength in this sector.  

The much-reported supply chain effect is starting to wane. Business inventories rose 2.1% in December, the strongest gain of the recovery. We have now seen five consecutive monthly increases, and that is a solid sign we are getting back to normal.


You must take some of the positive news with a grain of salt. When you look closer at Retail Sales, take two things into consideration. One, some of the higher reading was due to seasonal adjustments, unforeseen, like weather on your trip. Two, you need to consider the impact of inflation on this release. Sales are in nominal dollars, a portion of what the consumer is paying is for prices impacted by higher underlying costs. The true incremental increase in spending is not as high as the headline.

Wages are growing, but can they keep up with price increases? The FOMC is pledging to raise rates to combat inflation, but that will not impact many daily purchases. Higher rates may moderate housing and other interest costs, and history suggests rate increases take at least a year to impact inflation levels. 

If you own a house, you are in good shape, unless you want to add improvements, as costs are high. If you are in the market for a house, you will be paying top dollar, and mortgage rates are increasing. Supply chain restrictions are still a concern for builders, as well as finding reliable workers.

The concern with the inventory build is whether the consumer will pull to the side of the road for a break, given the uncertainties in the headlines. Given their significant impact to GDP, the distractions need to recede into the rearview mirror.


On the unknown side, we have geopolitical risks, the FOMC and inflation impact. Headlines are dominated by the Russia-Ukraine situation. The impact of an actual conflict on energy, online, bond and stock markets could be real but temporary. Markets do not like uncertainty and traders tend to sit out the early stages of armed conflicts. 

The FOMC is poised to raise short-term rates to get in front of rising costs, per one of their two primary directives. This has already been baked into long-term rates, at least to the point of market consensus. The risk here is that they do more than necessary and slow down the economy sooner than necessary. 

There is nothing wrong with some level of inflation as it helps economic growth. The 7% plus Consumer Price Index does not seem to be slowing down the consumer yet. They have increased wages and confidence in their job prospects. The question here is how long this spike lasts. Many signs show supply chains improving, but at the producer level, we have not seen the peak yet.


At the end of our trip to Fayetteville, most cars got there about the same time, regardless of driving style. The question for the economy is what destination we will reach, and how fast will we get there.

This time correction will play out over the next several months. The Fed understands they are behind inflation and must act. A war scenario may slow the speed of rate increases but we will still get to a pre-pandemic 2% to 2.25% down the road. Stay tuned for more signposts.

  Upcoming Economic Releases: Period Expected Previous
22-Feb House Price Purchase Index QoQ Q4 N/A 4.2%
22-Feb FHFA House Price Index MoM Dec 1.1% 1.1%
22-Feb S&P CS 20-city House Price MoM Dec 1.10% 1.18%
22-Feb Markit US Manufact PMI Feb p 56.0  55.5 
22-Feb Markit US Service PMI Feb p 53.0  51.2 
22-Feb Markit US Composite PMI Feb p N/A 51.1 
22-Feb Conference Bd Consumer Confidence Feb  110.0  113.8 
22-Feb Conference Bd Present Situation Feb  N/A 148.2 
22-Feb Conference Bd Expectations Feb  N/A 90.8 
24-Feb Initial Jobless Claims 19-Feb 235,000  248,000 
24-Feb Continuing Unemployment Claims 12-Feb N/A 1,593,000 
24-Feb GDP Annualized QoQ Q4 7.0% 6.9%
24-Feb Personal Consumption   Q4 3.3% 3.3%
24-Feb New Home Sales MoM Jan -0.7% 11.9%
25-Feb Personal Income Jan -0.3% 0.3%
25-Feb Personal Spending Jan 1.4% -0.6%
25-Feb Real Personal Spending Jan N/A -1.0%
25-Feb Durable Goods Orders Jan p 1.0% -0.7%
25-Feb Durable Goods ex Transportation Jan p 0.3% 0.6%
25-Feb Cap Goods Orders Nondef ex Air Jan p 0.3% 0.3%
25-Feb PCE Deflator YoY Jan 6.0% 5.8%
25-Feb PCE Core Deflator YoY Jan 5.2% 4.9%
25-Feb Pending Home Sales MoM Jan -1.0% -3.8%
25-Feb UM (Go MSU) Consumer Sentiment Feb f 61.8  61.7 
25-Feb UUM Current Conditions Feb f N/A 68.5 
25-Feb UM Expectations Feb f N/A 57.4 
25-Feb UM 1 year inflation expectation Feb f N/A 5.0%
25-Feb UM 5-10 yr inflation expectation Feb f N/A 3.1%

Mark Frears is an Investment Advisor at Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Science from The University of Washington, and an MBA from University of Texas – Dallas.

Steve Orr is the Executive Vice President and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary’s University School of Law. Follow him on Twitter here

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