Why Did The Market Drop?
Markets plunged this week on concerns that the Federal Reserve will continue to take on interest rates given a recent surprise spike in inflation. It seems market participants fear that inflation will continue to be very strong on the belief that there is no logical reason it will ease any time in the near future.
This certainly is a possibility. If inflation continues to run rampant throughout the economy, it could negatively impact company earnings, consumer purchasing power, as well as overall economic health. This, combined with geopolitical uncertainty, does make for a troubling current situation.
Current State of Interest Rate Actions
I was asked by the media to comment on this topic yesterday and I will share a summary of what I shared with them. Hopefully, you will find it helpful and will give you insight into how we perceive current data.
Inflation will likely continue to run fairly hot for the foreseeable future but will begin to ease once the effect of higher interest rates kick in. The pace of interest rate increases has been significant, and we believe will be a shock to the US economy. Still, this will take time to play out. The recent drop in wholesale prices1 provides a counterpoint indicator that inflation may be moderating. We believe this data should not be ignored.
It is true that unemployment and wage growth continue to be strong. However, we are beginning to see the first signs of economic weakness as some companies are laying off people in advance of a slowing economy (particularly in industries such as financial services and technology). Less workers means less demand for goods and services which will also mitigate higher inflation trends.
It is our view that the interest rate increases we are seeing now will have a significant impact on the economy. While we are likely to hear about high inflation for the next two or three months, we believe you will see over time that inflation is beginning to ease. Instead, concerns will rise about the fear of a significant recession.
We are investing on the assumption that rates will remain high, but that the pace will slow in terms of Federal Reserve rate hikes. We are investing on the assumption that growth companies that have tailwinds, as well as dividends-oriented positions, are the right type of equity assets to own right now. We are more heavily weighted towards large-cap assets. We continue to be underweighted in international assets related to emerging markets as we believe these economies will bear the brunt of a global economic slowdown.
We continue to avoid cryptocurrency despite calls to buy the dip. I’m not sure that falling prices from 69,000 and 19,000 can actually be called a dip but we are still not interested. We simply do not want to invest in assets that have price movements that cannot be logically explained.
Let’s not panic but instead look at dips in the market as an opportunity to add to positions or possibly for new assets to be inserted in the portfolio.
I know these are difficult times. I just received a call with someone who asked me if I thought that Russia will bomb Ukraine with a tactical nuclear weapon. His concern was what that might do to the overall economy. Obviously, it would not be good, but I can also name 100 other black swan events that can also be destructive to market and economies.
We do our best to deal with the probabilities of outcomes on issues that we see in front of us. We continue to be paranoid. However, we do not want to be in a position where emotions lead the way. Our perspective is that a long-term allocation wins the day. Steady hands on the steering wheel is part of our responsibility to you. We will keep doing just that.
Inflation is the rate at which the value of a currency is falling and, consequently, the general level of prices for goods and services is rising.
“Tailwinds” refers to or describes a situation or condition that will move growth, revenues, or profits higher. For example, lower gasoline prices will reduce the forecasted transportation costs of a manufacturing business and therefore increase profitability.
Large-cap (sometimes called "big cap") refers to a company with a market capitalization value of more than $10 billion.
An emerging market economy is an economy that's transitioning into a developed economy. Emerging market economies typically feature a unified currency, stock market, and banking system; they're in the process of industrializing
Destination Wealth Management constructs portfolios and investment objectives based on asset allocation principles coupled with tactical adjustments. The firm employs research analysts with relevant and diverse experience to conduct asset and economic research. DWM allocation philosophy will adjust based on market conditions and economic environment. Allocations are not static and will adjust as needed. These strategies may not be suitable for all investors. For additional information and disclosures, please refer to Adviser’s Form ADV Part 2A.
Fixed income broadly refers to those types of investment securities that pay investors fixed interest or dividend payments until their maturity date. Fixed Income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.