Only a few weeks into the new year and two of our annual predictions have already come to fruition.
The return of volatility – we have now experienced our first market pullback larger than 5% in the last twenty-two months. January marked the worst month for stocks (S&P 500 -5.26%) since the start of the pandemic. The cause of this fall is all the noise around the Fed trying to raise interest rates and weaning ourselves off of artificial stimulus created by quantitative easing.
Geopolitical tension - While rates were moving higher last month, Russia has been threatening the Ukraine with a large troop buildup on the border. These two events coupled together have spooked the market. We foresaw this happening, so we were not surprised. It is our view that a pullback concentrated in the securities with the highest valuations is quite healthy for the market. Higher quality lower valuation stocks actually performed much better.
Our thoughts remain the same as at year end
1. Economy is in good shape (jobs, retail spending, home sales, GDP).
2. Inflation is real (especially wage inflation) and will remain above normal for an extended period of time.
3. Holding stocks in inflationary times makes sense.
4. Interest rates will continue to rise, but we will still be below historic norms for sometime (we are not going back to late 70’s or early 80’s double digit inflation).
5. Holding a mix of diversified quality investments will serve our clients well.