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Are Higher Interest Rates The Harbinger of Gloom for Stocks?

Are higher interest rates the harbinger of gloom for stocks? That is what the market news headlines are wanting everyone to believe. Well, how true is it though? Yes, interest rates have been at historic lows and this fuelled high growth stocks in 2021 to historically high valuations. The Fed's "temporary inflation" outlook proved less transitory and more embedded in the economy and so the time had arrived to deal with this using the two tools at the Fed's disposal: raising interest rates and tapering or reducing its purchase of central bank assets, essentially a reversal of its quantitative easing policies and removing liquidity from the markets.

The markets reaction was immediate and high growth stocks sold off starting in November. The Nasdaq fell from a high of 16,764 in the second half of November 2021 to 13,724 in January, a fall of just over 20% and now sits at about 14,930 today, the last day of January 2022.

"Pending higher interest rates and Fed tapering required a re-valuation of tech stocks" was the communication coming out of every media outlet. In reality, it prompted a move out of yes, highly valued tech stocks into "value" stocks that had been left behind to that point in time. A sound strategic move, one can argue.

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Markets are on Edge. Are you?

The markets are on edge. The Fed has signalled it will use its tool box to curb inflation which includes raising rates and tapering. The market has shuddered. "Don't fight the Fed"! is the prevailing market wisdom. The market pundits and the news media are pronouncing that rising rates combined with less liquidity is going to be bad for stocks and that this could be the end of the historic bull market.

First of all, this movie has played out before. Between late 2016 and 2018 the Fed started to signal it was going to raise rates and high growth stocks sold off as they are the most rate-senstitive. Investors rotated into defensive stocks with strong earnings. However once rate hikes happened the same growth stocks that were now priced for those rate hikes, performed really well, while the defensive stocks did not. A good case can be made that we will see a repeat of the same pattern. Earnings remain robust, supply issues are likely to turn around in 2022 and inflation will eventually come down from it's current highs.

Likewise, the economy continues to find its way through the disruptions of COVID and while this may take more time than people think, we will move past COVID as the rest of the world begins to get vaccinated and build immunity. However, it would be foolish to discount new variants emerging over the coming 12 months - and more disruptions to global economies - while over 90% of the developing countries are still unvaccinated.

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2022 is Almost Here, So What's in Store for The Year Ahead?

We first want to wish all our readers and clients a Happy New Year!

As we say goodbye to a tumultous 2021, we look forward and to 2022 and what it may have in store for investors. 2021 saw inflation run away to heights not seen for decades. The Fed completely under-estimated this and shifted gears stating it was going to get serious about tackling inflation by tapering its bond buying and raising interest rates in 2022. The markets are re-calibrating. How big an issue is "inflation" and how soon can it be brought under control? These are the key questions as they will influence how aggressive the Fed is with respect to raising interest rates.

The key determining factors with respect to taming inflation are:

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The Infrastructure Bill and Implications for The Clean Energy Sector

Some bad news for Democrats in Virginia prompted some much needed urgency and positive action on the legislative front and the resulting upgrading of America's deteriorating infrastructure. The "Build Back Better" or $1.2 Trillion Infrastructure Bill passed through Congress yesterday and is now waiting to be signed into law by the President.

$1.2 Trillion is a number that is hard for most mortals to comprehend. It is a gargantuan ammount of money, the largest sum ever dedicated to the revamping of America's infrastructure.

So, what are the implications of this massive investment program for american companies. Who stands to benefit the most?

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The Case for an Extended Bull Market

We have often written about the "asset inflation" bubble caused by a trifecta of near zero interest rates, record levels of money printing not seen in american history and the federal reserve acting as a backstop for everything! Well maybe not everything, but again more than ever before. The "relative value" of the dollar continues to fall against this backdrop. a trend that has continued over a 50+ year period. The purchasing power of the dollar has fallen by 92% over the last 50 years. Let that sink in for a moment. The only saving grace is that other westernized countries are not faring much better yet none have the size of national debt of the USA. It helps to be the worlds reserve currency!

In the midst of a historic "asset bubble" of "everything" where many fund managers are cautious, there are well respected fund managers talking about a continuation of the bull market into 2038, one that is fueled by the "millennial" generation. The arguments are compelling and we wanted to share some of them in this article.

Cathie Wood, the architect of Ark’s comprehensive range of ETF's sais: “So this is the echo of the baby boom,” in reference to the millennial investors being the new drivers of an extended bull market into 2038 to mirror the baby boomers who fueled a 20-year bull market in stocks during the 1980's and 1990's.

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1600 South Main Street, Suite 190
Walnut Creek, CA 94596
Phone: 925-906-9800
Fax: 925-906-9884
info@hawleyadvisors.com

 

 

Hawley Advisors is an investment advisor, registered with the State of California. Any investment ideas or strategies on this website are for the purposes of education and general information only and should not be construed as specific investment advice. For more information about our firm please check the SEC Public Disclosure website: https://www.adviserinfo.sec.gov/

 

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