Market Update – February 18, 2022
February 18, 2022
As we approach the end of February, 2022 has seen heightened volatility that has been reminiscent of past corrections and bear markets. US economic data has increasingly indicated more persistent inflation and a tight labor market, both of which have driven the Federal Reserve to take a more hawkish stance. Forecasts for rate hikes have subsequently moved higher and have spooked the markets, especially expensive growth stocks. To make volatility even worse, we have seen numerous headlines over the past few weeks about a possible invasion of Russian forces into Ukraine. We believe the geopolitical tensions have created more noise in the background and we should focus on the issue at-hand, which is a Fed that will have to raise rates multiple times this year. The rate and level of rate increases remains a subject of much debate. Below we outline how the market reacts in a rising-interest rate environment.
It is important to look back at history to understand the effects of interest rate hikes on the market. With a few notable exceptions, equities have performed quite well. Since 1962, the S&P 500 has had positive performance approximately 79% of the time, with an average return of 17.33%. Each rate-hike environment is unique but what we as investors like to see is a slow and gradual increase in rates as opposed to a faster and higher increase.
There is also evidence that interest rates and the stock market go up together until the 10-year US Treasury hits 4.5%. Once it reaches this level, we start to see the S&P and 10-year move in opposite directions. If history is any indication, we expect to see positive performance in the stock market albeit with higher volatility.
We continue to monitor various economic and market indicators in the event we need to trim our equity exposure. As of now, trimming equities or other risky assets is not an action we will be taking as we still see opportunities to take advantage of.