Market Sentiment for Spring 2022
Rate Hikes, Inflation, Russia - How Will They Affect Your Stock Values?
February 18, 2022 | Sage Capone
As each day passes, it seems inflation, geopolitical conflict and the Federal Reserve’s next decision captures the headline of every major newspaper that can make investors panic and debate how these decisions will affect their individual portfolios.
Rate Hikes from Market Returns
The Federal Open Market Committee (FOMC) of Federal Reserve has not made any official increases but it has signaled that it will begin raising the fed funds rate and reduce asset purchases. The combination of economic and inflation data will be the deciding factors for the Fed.
If we anticipate the FOMC will announce a rate hike at the next meeting. What should we expect with returns in the market? When we look at the data for the S&P 500 in corresponding years of rate hikes, shockingly market returns have held up quite well. As we know history is no guarantee of future market returns
Bloomberg research showed that the S&P 500 averaged 9% during 12 rate hiking cycles going back to the 1950s. The market’s cyclical bias can cause a short-term drop in returns that leads to a positive return.
Looking at the 1970s rate hike we did see a negative return. Thus, a bigger retreat could also be something that could happen versus the historical average.
Impact on Markets with Russia Ukraine Conflict
News has spread that Russia may invade Ukraine. Investors should be aware that there is likely to be a knee-jerk market reaction, but geopolitical events often do not have a lasting impact on financial markets.
The attachment below provides a good framework to see how stocks have responded to other geopolitical events. The average one-day decline is -1.14% with a total event-driven drawdown of -4.39% over 16 days and then recovering in an average of 35 days.
Value Stocks Time to Shine?
When looking back historically, we find that value stocks historically have performed better during decades experiencing above average inflation.
As growth stock valuations have gotten exceptionally high, it may be a time for value stocks to continue to outperform. For a good period, value stocks have under-performed but this may be the right environment for them to continue outperforming for an extended period.
Nevertheless, we can never predict what stocks will outperform during high inflation so it’s best to have a diversified portfolio that can weather different economic environments.
A diversified approach will not prevent you from seeing losses in your portfolio during a recession, but it will reduce the losses you would see in a more concentrated portfolio.