The Fed Gets What It Wants
Today was another tough day in the markets after an equally tough one on Friday. The S&P 500 is down 22% from its high in January 2022, closing at 3,750. The Dow Jones Industrial Average closed at 30,517, off 16.6% year-to-date. You might be wondering what's going on? Is there any end in sight to the market decline?
It's well known that two emotions drive market prices: greed and fear...and fear is at the helm right now. There are more sellers than buyers, causing security prices to decline, but if you stand back and look at the bigger picture, this is exactly what the Fed wants.
Right now, the primary focus of the Federal Reserve is to reduce inflation, which reached a 40-year high of 8.6% in May. In basic terms, one way to bring inflation down is to increase goods supply, which is currently hampered by the supply chain issues at the ports. This is out of the Fed's hands. Another way to reduce inflation is to dampen consumer demand for goods/services as less demand leads to lower prices. This is within the Fed's purview, and by raising interest rates, the Fed increases the cost of spending for consumers (ie: think mortgage rates relative to home purchases, borrowing rates relative to car loans, interest rates relative to credit card purchases).
History of the 30-Year Fixed Mortgage Rate
Unfortunately, the securities market is reacting negatively to recent and expected Fed rate hikes, and as the stock market falls, fear grips investors and more selling occurs. This downward spiral also plays into the Fed's wishes - as lower consumer wealth (and confidence) means less consumer demand for goods and services! The combination of falling investment values and higher interest rates appears to be working. Inflation is now more likely to peak, and once it does, there should be less market volatility.
Yes, volatility will likely persist through 2022, but the froth is gone from stocks and higher returns can be expected.
Pamela Chen is the Founder and Chief Investment Officer of Refresh Investments LLC, a fee-only financial planning and investment management firm located in Santa Monica, CA serving clients throughout the great Los Angeles area and the United States.
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