When writing this article on May 1st, I can’t help but think what a year it’s been! Markets have been volatile, influenced by headlines about inflation, rising interest rates, and war in Eastern Europe. Large-cap technology stocks that performed well in the pandemic and 2021 are now seeing significant corrections.
Inflation, as you know, is at a 40-year high. There are many reasons for this, including the pandemic’s effect on supply chain issues. Root causes for inflation have many arguments, some of which resemble the chicken-and-the-egg analogy. The fact remains that America has supply shortages, shipping backlogs, and product delays. Is inflation causing market correction, or are market corrections creating inflation. Just look at lapses in both the Construction and Automotive industry to understand what’s going on. No one can accurately predict how long inflation will last. I hope that the law of supply and demand will find a balance.
To combat inflation, the Federal Reserve is raising interest rates in 2022. How much or how often is another debated subject. When the Fed raises rates, markets react negatively. Rising rates also impede the present value of bonds. Bonds are considered a safe haven during market downturns; however, as we’ve seen, even the bond markets are reacting negatively to the Fed hike. Bond rates have remained at 0% for two years. A big reason for this is our money supply is at record levels. Think of Covid stimulus checks and the Federal Reserve buying back much of the money they printed.
What is an investor to do? During times of uncertainty, it’s important to remember that investing is a long-term strategy. There will be opportunities in specific sectors. I also think that once we get through these rate hikes and mid-term elections, some stability will return to equity and fixed markets. Clients, especially retirees, should look forward to stable bond yields and investment options that at least match inflation to protect one’s purchasing power.
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