Liftoff: Nicolet Wealth Management Market Update

Thank you for your continued confidence and trust in Nicolet. Federal Reserve officials recently voted to end their highly accommodative zero interest-rate policy and lift interest rates by a quarter point. This officially begins a new cycle of interest rate hikes and is just the third initiation of a tightening cycle in the past 20 years. Additionally, the Fed gave guidance for six more rate increases by year’s end, which would be a very aggressive pace if executed.

The Fed’s dual mandate remains maximum employment and stable prices. While the most recent employment report showed a fourteenth consecutive month of employment gains, and an unemployment rate of 3.8%. Current employment levels are now near the low end of the 3.8% to 4.3% range that Federal Reserve officials consider consistent with full employment, and also near the pre-pandemic low of 3.5%.

However, the most recent inflation report continues to suggest prices are far from stable. The last consumer price index (CPI) report showed that prices increased by 7.9% from a year ago levels, the fastest rate in 40 years. Subsequently, the Russia-Ukraine war and retaliatory sanctions have recently caused additional inflationary pressures, primarily higher commodity prices. The average price of nine commodities produced by Russia, Ukraine, and Belarus have almost doubled since the start of the year. Vanguard and other leading economist are now forecasting that inflation, as measured by headline CPI could accelerate by 1 to 3 additional percentage points above previous pre-war forecasts.

The Fed’s focus on bringing inflation down from a historically high level amid a strong labor market has caused shorter-term U.S. Treasury yields to increase significantly so far this year. For example, the yield on a U.S. 2-year Treasury note has increased from less than 0.75% at the start of the year to the most recent 2.14%. In contrast, the yield on a U.S. 10-year Treasury note has only increased by about half as much this year going from 1.63% to 2.36%. The yield-curve spread between 2- and 10-year Treasuries has narrowed from 160 basis points a year ago to about 20 basis now. This flattening of the yield curve generally reflects both expectations for a rapid series of interest rate hikes and concerns about slowing growth.

The significant rise in interest rates has again depressed fixed income investment returns in 2022. The aggregate investment grade bond market is down 6% this year. Absent a rebound in bond prices this would be the first back-to-back negative returning years since the 1950s. The S&P 500 Equity Index has bounced off the year-to-date low point set on March 8th but remains down around 6% year-to-date. Interestingly, the S&P 500 is now up 3.5% since Russia first invaded Ukraine in late February.

We remain positive on equities considering both consumers and corporate fundamentals remain strong, valuations have been reduced, and continued expectations for positive GDP growth. However, our optimism continues to be tempered by concerns over the risk of higher sustained inflation, geopolitical uncertainty, slowing growth, more supply chain disruptions, and a flattening yield curve.

As a result, Nicolet Wealth Management continues to maintain a disciplined long-term approach and is prepared for a range of potential outcomes. If you would like to discuss your account in more detail, please contact us at your convenience.

Nicolet Wealth Management


Although we believe it to be reliable as of the publication date and have sought to take reasonable care in its preparation, all information provided is FOR INFORMATIONAL PURPOSES ONLY and we make no representations or warranties regarding its accuracy, reliability, or completeness and assume no duty to make any updates in the event of future changes. Past performance may not be indicative of future market results. Any examples used (including specific securities) are generic and meant for illustration purposes only and are not, and should not be interpreted as, offers to buy or sell such securities. To the extent indices are referenced, please note that you are not able to invest directly in an index.

Nicolet Wealth Management is a brand name that refers to Nicolet National Bank and certain of its departments and affiliates that provide investment advisory, trust, retirement planning and insurance services. Investment advisory services offered through Nicolet Advisory Services, LLC (dba Nicolet Wealth Management), a registered investment advisor. Securities offered through Private Client Services, LLC (“PCS”), member FINRA/SIPC. PCS is not affiliated with Nicolet National Bank or Nicolet Wealth Management.

All investments are subject to risks, including possible loss of principal, and are: NOT FDIC INSURED; NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY; AND NEITHER DEPOSITS OR OTHER OBLIGATIONS OF, NOR GUARANTEED BY, Nicolet National Bank or any of its affiliates. Neither Nicolet Advisory Services nor its affiliates offer tax or legal advice. You should consult with your legal and tax professionals before making investment decisions.

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