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.
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.
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971