Gill Capital Partners Late-January 2022 Market Update
We just sent a market commentary last week, and while we don’t want to overwhelm you, we do want to send relevant, factual and concise information as it is appropriate. There is quite a lot going on and markets have been volatile, so we feel more frequent updates are appropriate. Over the past week, we have had news from the Federal Reserve, saber rattling in eastern Europe, and the start of earnings season, which have driven bouts of extreme market volatility. We will touch on each of these, and of course provide our view on them.
The Federal Reserve
The Federal Reserve announced yesterday (with little surprise) that the central bank is ready to raise rates at its March 15-16 meeting. Furthermore, Powell left the door open to raising rates at consecutive policy meetings, which are held roughly every six weeks. As we’ve stated previously, The Federal Reserve has clearly communicated its plan to steadily increase interest rates over the next couple of years, eventually achieving an overnight borrowing rate near 2% by sometime in 2025. The market is currently pricing in a faster pace of rate hikes on the front end, but a lower terminal rate than what the Federal Reserve has forecasted. In addition, the central bank also approved one final round of asset purchases, which will bring the stimulus program to a conclusion by March.
Our view –The Federal Reserve will be raising interest rates beginning in March; the only question is how aggressively. We continue to believe that, despite their tough talk and the market’s anxiety around inflation, the Fed will be unable and unwilling to aggressively increase interest rates, particularly if capital markets continue to experience significant volatility. We believe they will do as they say, and do not wish to second guess their messaging. We do not view the Federal Reserve’s goal of 2% to 2.5% interest rates as restrictive from a long-term perspective. Furthermore, in many previous tightening cycles, markets have corrected prior to the Federal Reserve commencing increases and rallied once they began raising rates.
Russia & Ukraine
The other new variable over the past week or so has been increased rhetoric and fear coming out of eastern Europe. Many believe it is becoming increasingly likely that Russia will imminently attack Ukraine. This is causing fear and anxiety globally around a complicated, significant, and broad military conflict between NATO countries and Russia, who appears to have its sights set on further western expansion and wedge-driving within NATO.
Our view – While the military buildup at the Ukraine border has been happening for months, it is quickly reaching a tipping point. Financial markets have been spooked this week by the prospect of an imminent military conflict. We do not know if or when this will happen; hopefully, cooler heads and negotiations will prevail. While there is certainly the risk of conflict, it is not clear what that means for markets, and we do not see this as something that should drive investors’ short or long-term investment decisions.
Recent Market Volatility
Markets have been swinging wildly for the past couple of weeks, digesting higher interest rates, inflation fears, a resurgence of COVID, and fear of a conflict with Russia. Both stocks and bonds have started the year off with negative returns. The tech heavy NASDAQ has seen the worst performance, down nearly 15%, while the S&P 500 is down approximately 8% year to date.
Our view – While market volatility can be stressful from an investor’s perspective, it is also a normal part of the experience. In fact, as demonstrated in the chart below, on average, the S&P 500 experiences an intra-year drop of approximately 14%, and despite these drops, the S&P 500 has generated positive returns 32 out of 42 years since 1980.
While it doesn’t always feel good to experience volatility, and there are always arguments not to invest, long term returns are very compelling, particularly given today’s historically low interest rates and the recent pullback in the equity markets. We are continuing to allocate to equities as appropriate.
As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.