06/07/2022 Market Commentary - Interest Rates, the FED, and the Stock Market

Nearly halfway through 2022 and what we can say for certain … markets have been on a roller coaster ride.

​The trio reflected in the title of this blog post has rattled investors year to date.  Reality is that since last Fall, many stocks within the Nasdaq and S&P 500 are down double-digit percentages. 
 
Cathy Woods’ ARK Innovation ETF, symbol ARKK1, that gained so much attention during the COVID-19 Pandemic, is down over 50% year to date.
 
The bond market measured by the Aggregate Bond Index2 is down over -10% YTD, while the S&P 5003 is negative by just over -13%.  Truly, this is one of the most complex times in the markets … a time that we’ve been anticipating for several years. 
 
When would stocks and bonds both deliver potential negative returns?  It doesn’t happen very often, but with interest rates historically low and inflation historically elevated, it makes for a recipe for volatility.
 
Aggregate Bond Index Chart – Since 200

There have been very few places to hide from the volatility, and add to it the war between Ukraine and Russia.  An example?  A 60 stocks/40 bond moderate portfolio,4 offered by many financial firms, is down over -10% this year.
 
The good news, the FED is hiking interest rates.  For conservative investors, that should give us an opportunity in the coming months to get higher rates on money market and short-term bonds.
 
The chart above reflects the price of the aggregate bond index.  Rising interest rates results in falling prices, levels not seen since early 2000s.
 
In addition, as we’ve written about over the past month or two, it’s our humble opinion there could be a better opportunity to invest in high quality stocks once the market digests the rate hikes and inflation.  We also need to see how high inflation, the war in Ukraine and rate hikes affect corporate earnings.
 
Our December 23, 2021, blog post discussed how the S&P 500 was “out of bounds” and would need a rest, at the very least.  The chart below highlights an area of support, which gets the markets back into a more reasonable pattern. 
 
We will see if over time that becomes a reality or not. 
 
S&P 500 Index Chart – Since 2000

The financial markets have been largely “buoyed” by the Fed’s “easy money” corporate buybacks, low interest rates, and five mega cap technology stocks.  The Federal Reserve, as of this month, are taking away the punch bowl.  Not only have they started a rate hike cycle, but we’ve also entered “QT” (quantitative tightening). 
 
What is QT?  Simply think of this as the opposite of what they’ve done for emergency purposes, such as during the 2008 financial crisis and the 2020 Covid pandemic crisis:  Liquidity for the financial markets and bond purchases to drive down interest rates, hoping to spur economic growth. 
 
The questions throughout the years have been…

1. When will it ever end?
2. What will be the outcome of easy money? 
3. Will it cause inflation, or worse, stagflation?

 
The answer to those questions appears to be playing out, but will likely take more time to understand the aftershocks.
 
Corporate executives such as Jamie Dimon of JPMorgan recently made surprising statements.  In fact, Mr. Dimon stated that we could potentially find ourselves in a financial hurricane.6
 
Bottom line is, it’s a bit of a guess by everyone.  It’s hard to know what the Federal Reserve will ultimately do with interest rates, how the economy will be affected by less “juice” from the Fed, and what the financial markets have discounted thus far.
 
There was an Interesting interview by former president of the Federal Reserve Bank of New York.  You can access it by googling “If stocks don’t fall, the Fed needs to force them”6 – Bloomberg.
 
Happy Summer!
 
Mike Reinhart and Leonard Rhoades

Source:

1. ​https://yhoo.it/3Je8RHThttps://yhoo.it/3jgPaVs
2. https://yhoo.it/3KjgM8c
3. https://yhoo.it/3NUVjEU
4. https://www.cnbc.com/2022/06/01/jamie-dimon-says-brace-yourself-for-an-economic-hurricane-caused-by-the-fed-and-ukraine-war.html
5. https://www.bloomberg.com/opinion/articles/2022-04-06/if-stocks-don-t-fall-the-fed-needs-to-force-them