November 16, 2022

December 2022 Market Update

The Federal Open Market Committee (FOMC) announced a seventh consecutive rate increase of 50 basis points at the December 13th meeting. This pushes the rate to the highest it’s been since December 2007. Immediately following, during the press conference, Chairman Jerome Powell opened the door for slowing the pace of hikes at the future meetings. However, he did make it clear that a pause in interest rates was not under consideration at this point. This totals 425 bps of rate hikes in less than 5 months.

We are currently living through one of the largest coordinated increases of money supply in history- fueled by the global pandemic in 2020.

Why is the Federal Reserve moving so fast? One word: Inflation. We are currently living through one of the largest coordinated increases of money supply in history- fueled by the global pandemic in 2020. According to the US Federal Reserve, some 20% of US Dollars in circulation were created in 2020 alone. This dramatically increased Household Liquid Assets as well as Household Net Worth. This increase in money supply, global supply constraints from China’s Zero Covid policy, and Russia’s unjustified and unprovoked war against Ukraine have impacted all prices including food and energy.
So far this year, the prices of almost all conventional assets are down. Bank of America was quoted as saying a traditional 60% equities/40% bonds portfolio is annualizing one of the worst returns in 100 years. 2022 has marked a year where there has been no where to hide. Diversification has failed and asset correlations have been high. Balanced, multi-asset portfolios have been badly damaged. They all appear vulnerable to the same risks, rising interest rates and rising risk premiums, which unfortunately are happening at the same time. The only conventional asset appreciating has been commodities.
From 1980 through July 2022, the 60/40 portfolio delivered positive returns in 35 of 42 years. That means investors who relied on this investment mix have seen their portfolios increase in value 83% of the time. Making significant investment decisions after one year of unsatisfactory performance is never a good idea. Think long-term, remain committed to your overall plan and take advantage of dislocations during these periods have historically proven the most successful.
Many experts believe that the coming decade will have similarities to the 1970’s- a period of political, economic and inflationary turmoil, which historically means more volatility.
The best advice for investors?
Peter Drucker, the father of modern management thinking, said: “The greatest danger in times of turbulence is not the turbulence. It is to act with yesterday’s logic”
Today’s investor will require a new approach to constructing portfolios- flexible, adaptable, robust and responsive.
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