February 2022 Market Insights
By: Linda S. Parenti, CFA - Chief Investment Strategist
As investors, we will always face concerns and today is no exception. The high demand for goods combined with persistent supply chain issues have pushed prices up, bringing inflation readings to levels not seen in nearly 40 years. Russian troop movements near the Ukraine border are the latest addition to ongoing geopolitical tensions around the globe. Many economic readings continue to be influenced by COVID-19 trends, making forecasting tricky. The growing list of worries, one of the top among them being inflation, has resulted in downward pressure on both stock and bond markets.
Earlier this week the Federal Reserve released the minutes from its Federal Open Market Committee meeting. Their view is that the economy is strong, but inflation has risen higher than expected. To combat this, they plan to start raising interest rates and reducing their balance sheet with the goal of tempering strong consumer demand. There was also consensus that the pace of this next tightening cycle may be faster depending on the level and direction of economic readings in the months ahead.
It is a foregone conclusion that the Fed will start increasing rates at their March meeting. At present, the markets are pricing in an aggressive series of rate adjustments for the rest of the year, with some predicting a 0.50% increase at the start. But what markets expect does not necessarily dictate Fed actions. While the Fed could start that aggressively, it would not be typical. Looking back over the past four Fed tightening cycles, individual increases of 0.50% and 0.75% have occurred, but most of them were paced at 0.25% each. And none of those cycles started out with more than a 0.25% increase, which may be appropriate if the Fed is truly data dependent and wants to be nimble.
In the meantime, rising interest rates do not necessarily spell doom for the economy or equities. Especially considering they are rising from historically low levels and are doing so during a period of economic strength. In fact, if you compare periods when the Fed was lowering versus raising rates, in general stocks perform better during the latter. This makes sense if you think about how monetary policy works. The Fed eases (lowers interest rates) when the economy is weak or in a recession. They tighten (raise interest rates) when the economy is strong to regulate inflation.
It's important to note that there are other factors besides monetary policy that should help curb inflation. Fiscal policy has become less accommodating now that the government’s pandemic related loan programs and stimulus checks have ended. There are also indications that supply chain bottlenecks are starting to ease. Lastly, consumer resistance to high prices often cures high prices. The secret to successful investing is to objectively determine what matters in the long term and leave the short-term market rotations to the traders.
Linda S. Parenti, CFA
Chief Investment Strategist
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.