Our accounts have performed very well again this year. Despite economic headwinds from Covid related restrictions, distribution channel disruptions and labor shortages, the economy ended the year very strong albeit with some inflationary pressures. The Federal Reserve is becoming increasingly concerned that this inflation is not merely a temporary transitory effect from supply disruptions, but that we are running the risk that inflation is becoming entrenched.
The Fed has been quite vocal that in the near future it will be winding down its quantitative easing monetary stimulus operations and will also start to raise interest rates possibly as soon as March. The strong reaction from the markets in response to these comments indicates that these anticipated monetary tightening actions will likely result in severe negative market and economic consequences beyond taming inflation. Intuitively, it seems unwise to try to contain inflation shortly after a massive Omicron surge that has already been a disruption to the economy and a cause of some degree of the inflation. As long as the Fed persists in its projected course of action, we believe the markets will continue to be highly volatile.
The telltale sign that these market conditions are related to the Fed’s higher interest rate projections is the fact that the stocks most affected by the volatility are the well know high tech growth stocks that are most affected by interest rates. The blue chip industrial stocks have been less affected.
Even though there is growing concern that a war may be imminent in Ukraine, we see this as contributing minimally to the market volatility. The Covid pandemic, barring the emergence of new and ferocious variants, we believe, will begin winding down. In addition, the recession indicators and predictors are all relatively benign, including the current interest rate yield curve. The driving force of market volatility at present is most certainly the anticipated interest rate moves at the Federal Reserve and we are intensively monitoring this situation.
As always, we remain cautious and vigilant. Please remember that because these quarterly thumbnail sketches are very brief, do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.
Very Best Regards,
Joseph L. Toronto, CFA