Be it high or low, it doesn’t matter. I need to stay calm and neutral all the time.
Vijay Shankar – Indian Cricketer
We’ve talked in this space before about strategy abandonment…and how common it is for inexperienced investors to abandon strategy at precisely the wrong moment. Today, let’s discuss the recent rise in concern over the direction of interest rates, and connect it directly to strategy abandonment.
There seems little doubt today that interest rates are on the rise and that may cause some investors to question the direction of the markets and the economy in general. When benchmarks move in this fashion, it becomes tempting to want to change direction. It might be helpful to your clients, to remind them of the ultimate goal of the Fed and policymakers relative to interest rates, and to provide context.
The question surrounding interest rates isn’t whether or not they will rise, but instead it’s how many rate hikes it will take to move interest rates back to a “neutral policy rate” …a rate that neither stimulates nor restrains economic growth. As the Fed considers and executes rate hikes, they do so with an eye on achieving neutrality. The Fed apparently believes that the economy is strong enough to absorb an interest rate hike.
In light of the pandemic, inflation and the brewing conflict in Eastern Europe, this neutral policy or “policy normalization” may be difficult to achieve. It is important to pay attention to rates and to other economic signals and indicators, but it is also important to provide your clients with the context and perspective that will allow them…and you to maintain an eye on the long-term and to avoid strategy abandonment.
With the Fed embarking on a new course of monetary tightening amid continued fighting in Ukraine, stocks staged a powerful, broad-based rally last week.
The Dow Jones Industrial Average jumped 5.49%, while the Standard & Poor’s 500 gained 6.16%. The Nasdaq Composite index soared 8.18% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, advanced 5.17%.1,2,3
After surrendering gains on Monday, stocks surged higher for four consecutive days. The rally was propelled by strong economic data, the outcome of last week’s Federal Open Market Committee (FOMC) meeting, and reports that Russia made interest payments on its sovereign debt, avoiding technical default.
The uptrend began with a drop in oil prices and a lighter-than-expected wholesale inflation report. Stock prices initially buckled following Wednesday’s hawkish FOMC announcement, but turned higher as investors interpreted the Fed’s news as a welcome plan to combat inflation. Stocks extended their gains into the final two trading sessions, cementing their best weekly performance since November 2020.4
The Fed’s Plan
For the first time since 2018, the Federal Reserve hiked the federal funds rate, increasing it by 0.25% and signaling that it expected to raise rates at a faster pace than originally outlined in December. Based on its projections of future fed fund rates, the Fed may implement seven quarter-point rate hikes this year and another three to four next year.5
In a statement following the FOMC meeting, Fed officials expressed rising concerns over inflationary pressures made more acute by the war in Ukraine. Members also indicated that they would soon announce a plan to reduce the Fed’s $9 trillion balance sheet.6
This Week: Key Economic Data
Wednesday: New Home Sales.
Thursday: Jobless Claims. Durable Goods Orders. Purchasing Managers’ Index (PMI) Composite Flash.
Friday: Consumer Sentiment.
Source: Econoday, March 18, 2022
This Week: Companies Reporting Earnings
Monday: Nike, Inc. (NKE).
Tuesday: Adobe, Inc. (ADBE).
Wednesday: General Mills, Inc. (GIS).
Source: Zacks, March 18, 2022
Footnotes and Sources
2. The Wall Street Journal, March 18, 2022
3. The Wall Street Journal, March 18, 2022
4. CNBC, March 18, 2022
5. The Wall Street Journal, March 16, 2022
6. The Wall Street Journal, March 16, 2022
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