Let's talk money.

For whomever follows the stock markets closely (like us) you may have noticed that the markets have gotten more volatile in the recent weeks, and somewhat down 9-10% from the market highs established in late December.

The market volatility has coincided with a new wave of COVID infections around the world (Omicron), inflation coming up higher than in the last 30+ years (at about 7% annual in US), as well as the Federal Reserve plans to reduce their asset buying plans initiated during the beginning of COVID crisis. In addition, the FED had also communicated in its last December meeting that it would start to raise rates that have been set at 0% for the last 2 years, also confirmed in this last meeting of January 26, 2022.

The stock markets are always forward looking and as such are trying to figure out all of the moving pieces mentioned above, plus more geopolitical uncertainty coming from a potential Russia-Ukraine conflict. Interest rates for mortgages and other similar loans have already moved up in anticipation, as well as high-growth stocks with high valuations have dropped as the interest rates are expected to increase.

Overall, we believe this has been a healthy adjustment. As we know, the market comes from an unexpected stellar performance in 2020 and 2021, amidst a global pandemic, with total S&P 500 returns (including dividends) of 18.4% in 2020 and 28.71% in 2021. Those two years follow an even more impressive 2019 total return of 31.49% (including dividends). Many high growth stocks had run way ahead their valuations together with some extreme speculation in certain popular meme stocks that made the news in 2020 and 2021.

Looking forward we believe that the economy is running strong, with unemployment really low and many companies looking for employees even at higher salaries, benefits and perks. The inflation concern that was made worse by supply chain issues around the world seems to be a concern for some, but we believe that with the FED ending its asset purchases and starting to raise interest rates slowly, that inflation will most likely moderate. Just mortgage rates increase alone will potentially slow down the real estate price increases we saw in 2020 and 2021. In addition, research and data points out that raising interest rates (especially from 0%) is not a bad thing for stocks. Removing the excess inflation, while balancing the economy and removing some of the excesses is good for long term growth of stocks. In addition, being diversified as we are with our portfolios and having a long-term horizon with most of our clients’ portfolios gives us the opportunity to see such healthy corrections for what they are, part of the investing process (as markets don’t go up forever and uninterrupted) as well as potential opportunities to purchase stocks at more reasonable valuations.

Below research from Morningstar looking at times when the FED started hiking interest rates since 1994 points out the above conclusion, that FED interest rate increases are not bad at all for the stock market. On average stocks had gained 7.3% 12-months after the FED started hiking rates and bonds a respectable 3.2% on average. We believe that volatility may continue in 2022 as the unwinding of the many emergency monetary programs put in place during the beginning of COVID are ended, but that volatility will present opportunities to further invest for investors that have a long-term investing horizon like most of our clients.