Before I start on my comments about what’s been going on, I want you to know that I’ve been working on what to say for the last 30 days. Now that we’re a month into the year, I can add some color to what we’re seeing.
Since I started my career as a financial advisor, I truly believe there is a random walk down Wall Street – no one can explain every single market up and down. Of course all the social media sites and endless news outlets try to! But here’s my take. 2021 was a wonderful year for the equity markets, and anyone who invested in the major indices saw significant gains throughout the year. For us in this business though, 2021 wasn’t the year most people thought it was. Those of us who pay attention know that January and February of 2021 brought one of the biggest ramp-ups in speculation I’ve ever seen.
Whether it was cryptocurrencies including Bitcoin, or the beginning of the wave of Redditors who would take Game Stop and subsequently AMC to unfathomable levels in a short squeeze, it all reeked of speculation. Combine that with the fact that I had clients asking if they should buy and immediately sell Michael Jordan cards, or hit a knife show to try to sell one for $100 that they bought as a kid for fifty cents, well, speculation was everywhere.
These occurrences had me very concerned at the time that a crash of epic proportions might be coming. Asset speculations like these historically don’t end well. And while 2021 was a wonderful year, the peak in many of these areas occurred as unemployment benefits expired, moratoriums on evictions were lifted, and we saw the last of the advance child tax credits. Suddenly, all of that liquidity was removed from the markets in the fall of 2021. While many people celebrated the successes in their portfolios, I was concerned and our team took action to guard what the markets have delivered to us over the last decade of expansion.
That said, as a professional advisor, I never thought I’d see the phenomenon of a whole generation of retail investors taking advice from Reddit and Dave Portnoy. From the fall until now, while I can’t speak to how many have been wiped out, I do suspect significant losses have occurred from these so-called meme stocks. You may be wondering what all of this has to do with your portfolio. Well, it may mean everything and it may mean nothing. It would be nice to tie it all in a bow and say too much liquidity in the system led to this, but that may or may not be true.
I do know that January started with a bang. We found out that the Federal Reserve might raise interest rates four times instead of three. Now, the markets don’t like surprises, so this news was met with much consternation. However, to explain how these rate increases impact the financial markets, let’s look back to 2018. Remember that year when the Federal Reserve & Chairman Powell caused the markets to tumble with misplaced statements, only to say “just kidding?” Well, that same chairman and his merry board are in the news again as the minutes came out earlier in the month that, for laymen, were akin to talking about what to have for lunch, when to have lunch, where to have lunch and how much to spend, but then they never actually went to lunch. Everyone then got worried that they might to go to lunch too early, or too often, or overspend.
This is how the market reads the Fed’s notes. They’re smart, but they were surprised by the Federal Reserve lunch conversations, meaning that the Fed might go to lunch three times and that would be okay, but four times would be bad and lead to a potential slow-down, or food poisoning. You may be thinking, “Um, Dave, whatever is going to happen is going to happen, so why should I stress?” You sound like my therapist. Seriously though, this is what people pay me for.
To stick with the analogy, as the month of January transpired, the Fed didn’t just discuss going out to eat a fourth time – who knows, maybe they’re go out for a fifth time! Three, four or possibly five rate hikes? Well, remember how the markets don’t like uncertainty? They got spooked, fast.
As interest rates eventually go up, which affects mortgages, car payments, and credit card minimums, there is increased cost, and that cost is a headwind to economic growth. For the last decade, the Fed has kept rates low, creating a tailwind to the economy. As this inevitable shift to higher rates occurs, there will be bumps and increases that could send us into a recession just as we’ve seen before – but we will survive. It’s important to note that 2022’s market volatility won’t necessarily harm your portfolio long-term, but it might slow the growth of the companies and their respective earnings that you hold in your portfolio.
We shouldn’t be surprised by this. The Federal Reserve has been saying for years they’d eventually raise rates. It’s also worth noting that this is not new. It’s actually the third round of rate hikes during my career as an investment advisor. We have been and our team will continue to adjust your portfolios as needed to fit this new environment.
Lastly, I do think it’s important to remind you that higher interest rates do not mean the markets have to crash. They may continue to be volatile and move lower before they eventually move higher, but that’s simply market volatility. While I never like to see any of the companies that we have in our portfolio fluctuate downward, the reality is that just because Apple’s or Microsoft’s stock price falls, it has no bearing on the corporate earnings and goals those companies (and the other 498 that make up the S&P 500) are working towards on a daily basis.
As always, I’ll remind you that while 2022 may see more volatility surrounding every single Fed meeting and decision on interest rates, that volatility does not equate to absolute risk and loss. Sometimes the markets gyrate back & forth. There’s nothing to read into when you look at the tea leaves – it’s just volatility.
The upside to his volatility is that there are always opportunities presented to us. You have my assurance that we’ll be on the lookout for any ways to realize these opportunities in your portfolio as we continue to take a three- to five-year approach. As always, please let me know if you have any questions – that’s what we’re here for. Give me a call so we can chat.
Article by David Smyth, Senior Partner at Family Financial Partners — a financial services firm in Lexington, Kentucky.
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