On Wednesday, March 16, the Federal Reserve increased interest rates for the first time since December 2018 with a .25% hike. More hikes are expected later this year (up to 6).
Questions we want to
answer for you:
Why should I pay attention?
What might this mean for my investments?
Jerome Powell, Fed Chairman has emphasized he wants to see the month-over-month inflation numbers come down. The Fed is increasingly concerned about inflation becoming unmanageable, and it latest projections indicate it may move rates above its long-term neutral rate of 2.4%. The neutral rate is a theoretical federal funds rate at which monetary policy is considered neither accommodative nor restrictive. Having said that, interest rates would still remain below inflation, creating further questions as to the effectiveness in bringing down inflation. Investors should pay attention since the interest rate cycle (interest rate curve) has historically been a good barometer for where we are at in the economic cycle.
It is important for investors to remember that Fed rate hikes typically occur near the middle of the economic cycle, which means there are potentially a number of years left of gains in equities and the economy. Historically, markets have been relatively strong a year after the initial rate hike, with the exception of 1987. According to LPL Research and Bloomberg 2.1.22, since 1983 the average return for the S & P 500 12 months past the first rate hike is 9.2% in every cycle since 1983 and stocks were higher every time except 1987 as mentioned earlier.
The Bottom Line
The bottom line is rate hikes usually aren’t in and of themselves immediately bearish events and our team does not expect the early part of this cycle to be any different. For the short term, the headline news will be focused on Ukraine and related inflation issues, and until resolved, will create volatility in the markets. The long term should still be focused on inflation and interest rates, as these will be the driver of corporate earnings which eventually drives stock prices. The bond markets have “priced in” at least 6 – 8 additional .25% rate hikes this year and next, so expect these announcements to continue. We are watching all the data closely and our investment committee will be making some portfolio allocation shifts to reflect the dynamic nature of this economy.
April 2022
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. No strategy assures success or protects against loss. Investing involves risk including loss of principal.
