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.
The shift to a remote or hybrid/remote work pattern is here to stay. Many companies are embracing this model which has added resilience into the economy.
The markets are uneasy and playing defense. As inflation starts to shift downward and the Fed starts to hike rates, as long as earning are strong, institutions will be pressured into allocating to more risk-on in the pursuit of net adjusted returns for inflation. We see a less defensive mentality prevailing. While the yield curve shows a net positive for banks, the incentive to lend remains, which in turn will keep fueling the growth cycle. The convergence of AI, Super Computing, Blockchain, Biotech and many other disciplines will fuel a new era of accellerated innovation and profitability.
Markets are at historic highs so pull backs, corrections and yes, bear markets are inevitable. No one can see the future but one can look at patterns and probabilities. In the last 50 years every recession has been foreshadowed by the inverting of the yield curve. The yield curve has yet to invert. The current signs do not point to a waning economy. The past is not a sure predicter of the future but it presents us with clues. There are more complexities to contend with today than ever before and likewise more opportunities and threats. No one can guarrantee what the future holds.
If managing your emotions in the midst of the inevitable "media fear mongers" - fear sells! - is hard and you do not have a wealth management firm, consider navigating the markets with one.