|In case you missed it: Our investment team hosted a 2022 market outlook and QA webinar on January 18, 2022. If you’re interested in learning more about our market outlook for this year, you can access the recording below. |
Webinar link: Exencial Investment Team 2022 Market Outlook and QA Recording
Impact of the Fed on Markets
By Tim Courtney, Chief Investment Officer
The Federal Reserve has taken a more hawkish tone recently and, as evidenced by recent moves, it is clear the market is paying attention.1, 2 The Nasdaq Composite Index briefly moved into correction territory this week3 and, while volatility is often perceived as something negative, it can be healthy for markets.
Although we may see more volatility in coming quarters than what we’ve witnessed over the last 20 months, we believe it is time for the Fed to end its more than accommodative stance and move toward more normalcy.
That said, we should note the obvious: the Fed is made up of people, and just like all of us, they find it difficult to time their moves in markets well. They often act too early or too late, and in this case, they have almost certainly started too late. The central bank is dialing back its bond purchasing program; this month, the Fed will only buy $60 billion in bonds, which is $30 billion less than it had purchased last December. This tapering is expected to accelerate through the year.4
It’s also expected they will begin raising interest rates more than previously anticipated – possibly three times in 2022 after formerly indicating they might raise rates once. This stronger response is due to inflation which came in higher and lasted longer than the Fed anticipated.
The market has been reacting to this stronger stance. Interest rates have moved higher after remaining still for most of the last half of 2021. Stocks have been more volatile, especially the prices of those companies that are currently unprofitable or those that have more of their expected profits materializing further off in the future. Most markets in the U.S. are now negative year-to-date.
One question often asked when markets reach highs with well-noted threats to market pricing (there always are some) is: are expected returns lower following market highs? Historically, returns following record market levels are statistically about the same as returns following markets at any level.
As such, we recommend taking times like these to ensure portfolios are properly rebalanced between stocks and bonds. We also recommend being invested in companies that are producing earnings for shareholders and are being productive by bringing goods, services and solutions to customers that need them.
Market volatility is par for the course when it comes to investing, and it looks like 2022 is going to be a more typical year than the low volatility we’ve experienced recently. Higher rates will likely be a good thing for bond investors and may end up being a good thing for stock markets as the fiscal and monetary policies begin returning from extreme levels. As always, if you have any questions about managing your portfolio, please reach out to your advisor.
- Yahoo! Finance (data as of 1/19/22) – S&P 500
- CNBC.com (12/15/21) – Fed will aggressively dial back its bond buying, sees three rate hikes next year
- The Wall Street Journal (01/20/22) – Stocks rise after Nasdaq enters correction
- CNBC.com (1/6/22) – The Federal Reserve is scaring markets with the triple threat of policy tightening
The term “Nasdaq” is also used to refer to the Nasdaq Composite, an index of more than 3,000 stocks listed on the Nasdaq exchange that includes the world’s foremost technology and biotech giants such as Apple, Google, Microsoft, Meta (formerly Facebook), Amazon, and Intel.
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