2022 has been off to a volatile start. The Financial Sector has seen its 8th correction of 10% of the markets in 20 years. As anxiety-provoking as corrections can be, they are a necessary part of the process, especially if we want to see a return on our investments. What supersedes concern about market corrections is a market recession. Interest rates are historically low, and inflation is high. Combining low-interest rates, disruptions in supply chains, Covid-19 shutdowns, and large amounts of stimulus cash, it’s important for the Fed to raise rates as they cannot stay at zero forever. Raising interest rates is how the Federal Reserve cools inflation. Cooling inflation will provide fixed income opportunities, especially for clients on a fixed income. It’s hard to not run out of money when inflation is at 7% and fixed rates are below 3%. As interest rates rise, consumers save because the returns from savings are higher. Consumers also tend to spend less when the cost of goods and services is more. In our current economic climate, fixed income opportunities, like bonds, don’t provide the risk-adjusted return many retirees want. Just look at your savings account. Any interest earned on a corporate or municipal bond, for example, gets eaten away by inflation. Increasing interest rates will provide additional investment options and make fixed-income products more desirable. It will also produce some market volatility. From my point of view, it would be nice to reduce the size of the Federal Reserve balance sheet by halting the purchase of American treasury bonds. As we head into spring it will be interesting to see what happens to inflation and interest rates. How often and when rates rise will be interesting. In my opinion, raising one to reduce another will be a good thing for the markets and general well-being of our economy and clients.
Securities are offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services are offered through Cambridge, a Registered Investment Advisor. Schott Financial Management and Cambridge are not affiliated.