Telemus Weekly Market Review December 13th - December 17th, 2021
Fighting the Trend
This week the Federal Reserve Open Market Committee (FOMC) met and made the decision to accelerate the pace of reductions in its monthly asset purchases (a.k.a. tapering). The reason for the shift is the Fed’s acknowledgement that inflation is no longer transitory and may be more persistent. By accelerating the cadence for reducing asset purchases, the Fed now expects to wind down its quantitative easing program by March of 2022, versus its prior target of June.
Fed Chairman Jerome Powell had previously communicated the Fed’s desire to conclude its quantitative easing program before looking to raise rates. The acceleration in tapering means that interest rate increases are likely to occur in 2022, with forecasts from FOMC members indicating an average expectation of three rate hikes.
Following the Fed’s meeting this past week, Treasury yields declined, more notably among longer dated maturities. While counterintuitive given the rhetoric, the markets initial interpretation is that more aggressive actions by the Fed will lead to fewer interest rate increases beyond 2022. Put differently, the market believes a more hawkish Fed policy will tame the current inflationary trend. The Fed, however, remains three months away from completing its tapering program and being able to raise rates. In our view, this may still prove to be too casual of a pace given the uptrend in inflation we’ve witnessed in recent months.
Over the past twenty-one months, a highly stimulative monetary policy has pushed investors toward riskier assets in search for yield and total return. As the Fed takes away the stimulus punchbowl and begins to raise rates, it’s likely we’ll see a shift in market sentiment. More speculative assets may see some headwinds as valuation multiples reset. Assets that are more interest rate sensitive, such as bank and insurance stocks, may become of greater interest. Within the bond market, having the Fed no longer increasing its share of the overall market should help to reset prices in line with risk. Furthermore, debt burdened companies may face some challenges by the prospect of higher funding costs. We would expect these shifts to be more gradual and don’t mean doom to the market. However, we think its important to note a more hawkish Fed is likely to result in a shift in market leadership. The two old sayings of ‘the trend is your friend’ and ‘don’t fight the fed’ are in conflict. The Fed seems to always win out and now may be the time to ensure your portfolio isn’t over indexed to those securities that have been outsized beneficiaries of the COVID rebound trend the past twenty-one months.
All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Telemus Capital cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance. Current and future portfolio holdings are subject to risk. Risks may include interest-rate risk, market risk, inflation risk, deflation risk, currency risk, reinvestment risk, business risk, liquidity risk, financial risk, and cybersecurity risk. These risks are more fully described in Telemus Capital's Firm Brochure (Part 2A of Form ADV), which is available upon request. Telemus Capital does not guarantee the results of any investments. Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, and may lose value.
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Matt joined the Telemus team in 2018. As Chief Investment Officer, he leads the firms the investment process and research effort. Matt has experience as an equity analyst and portfolio manager and has advised corporate pension plans on their manager selection. He’s been quoted in Money Magazine and Barron’s.
