Global stock indices have had a rough start to the year following very strong results in 2021. As the economy has improved, interest rates and inflation levels have begun to move up at a rapid pace, which has hurt the performance of many fixed-income investments. More importantly, the direction of future monetary policy has emerged as a major concern. The Federal Reserve Bank has stated that it will pursue a much tighter monetary policy stance and has embarked on a plan to raise interest rates. This shift, along with consistently strong inflation statistics, has increased uncertainty and contributed to the market volatility so far this year.
The Federal Reserve Bank
At the May meeting, the Federal Reserve Bank (Fed) raised interest rates for the second time in 2022. The target range of the Fed funds is now 0.75% – 1.00%. The most recent increase raised the benchmark rate 50 basis points, which was more than the 25 basis point increase in March. Domestic economic activity was relatively strong in 2021. Robust economic activity along with supply chain constraints has led to a spike in inflation levels. These higher prices, once regarded as transitory, are now regarded as more persistent. This shift in thinking caused the Fed to initiate a tighter monetary policy. Fed Chairman Jerome Powell has stated that he expects inflationary pressures to last well into the middle of this year and vowed to use the central bank’s tools—including raising interest rates—in order to halt the swift increase in prices.
Inflation
Price and cost increases have been experienced in many areas of the economy over the past few months. These increases have driven inflation much higher (see Consumer Price Index chart below). The pace of increases has reached levels not experienced since 1980. Federal Reserve officials are expected to maintain a ‘hawkish’ stance in coming meetings (wanting to increase rates & tighten policy). As mentioned previously, the Fed has already raised the Fed Funds twice but also plans to enact several more rate increases throughout this year.
Inflationary Impacts
The shift in the Fed policy outlook has had many impacts. One area is
mortgage rates,which have soared as interest rates have increased.
The mortgage business certainly follows a boom and bust cycle, but the rapid increase in rates has been surprising to many in the industry and will likely impact future demand. Other areas impacted by rising rates have been Real Estate Investment Trusts (REITs). As a group, these securities have edged downwards in 2022 so far, likely an investor response to a rising rate environment (the MSCI IMI approximates total equity market return). *source Morgan Stanley Capital Index
Yields on bonds have risen significantly so far in 2022. The March increase in rates by 0.5% is the sharpest in 22 years. Long-term bonds had fallen by more than 18% by April 30th, surpassing the previous record of a 17% loss in a 12-month period ending in March 1980.
Conclusion
Given the large number of unknowns surrounding inflation, it is likely that volatility levels will remain high going into the summer. Inflationary pressures could add to concerns that the Fed will further tighten monetary policy in order to rein in inflationary pressures. Therefore, markets could continue to be volatile in the near term. The Federal Reserve has the tough job of reducing inflation without stifling economic growth and causing a recession.
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5. Exchange Traded Funds (ETF), mutual funds and individual stocks are subject to risks and fluctuate in value. Neither asset allocation nor diversification assure a profit or protect against loss. International investing involves special risks including increased volatility, political risks, and differences in auditing and other financial
standards. Small-cap stocks have historically experienced greater volatility than average. High yield, lower-rated securities generally entail greater market, credit and liquidity risks than investment grade securities and may include higher volatility and higher risk of default. Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices. Past performance is no guarantee of future results. No representation is hereby made of the risk and/or return of any particular portfolio. There is no guarantee that any suggested investment strategy will work in any market. You should fully and carefully consider all objectives, risks, expenses and fee before you invest.
6. Portfolios are illustrative only. ActualLifeNeedsTM Portfolios will vary from time to time as determined by Idaho Trust Bank. No representation is hereby made of the risk and/or return of any particular portfolio. There is no guarantee that any suggested investment strategy will work in any market. You should fully and carefully consider
all objectives, risks, expenses and fees before you invest. Past performance is no guarantee of future results. Exchange Traded Funds (ETF), mutual funds and individual stocks are subject to risks and fluctuate in value. Neither asset allocation nor diversification assure a profit or protect against loss. International investing involves
special risks including increased volatility, political risks, differences in auditing and other financial standards. Small-cap stocks have historically experienced greater volatility than average. High yield, lower-rated securities generally entail greater market, credit and liquidity risks than investment grade securities and may include higher volatility and higher risk of default. Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices. Past performance is no guarantee of future results. For more information about
performance of Idaho Trust Strategies and our performance calculation methodology, please contact us. Actual client performance may vary from the performance of model portfolios and/or any strategy. No representation is hereby made of the risk and/or return of any particular portfolio. There is no guarantee that any suggested investment
strategy will work in any market. You should fully and carefully consider all objectives, risks, expenses and fees before you invest.
Portfolios are illustrative only. Actual LifeNeeds™ Portfolios will vary from time to time as determined by Idaho Trust Bank. The Idaho Trust investment strategies will vary from time to time as determined by Idaho Trust Bank. The information and analysis expressed herein are for general information only and are not intended to provide
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