Historical Lessons

Trading remained in a holding pattern at the beginning of the week, with full attention focused on the Federal Reserve meeting and their decision on interest rates. Following their announcement of a 75bps (.75%) rate hike, equity markets turned south. All three major indexes finished down between 4% and 5%. Fixed income yields rose following the rate hike and remain inverted, with the 2yr UST yielding 4.239% vs 3.755% for the 10yr. Oil ended the week severely down ~$8 the week to $78.74/bbl.

As expected, the Federal Reserve raised interest rates by 0.75%.  There was speculation of a potential 1% hike, leading markets to initially rally on the announcement. That quickly changed, as Chairman Powell spoke on the committee’s decision. His remarks reinforced the Fed’s aggressive stance on crushing inflation. Meanwhile, many analysts are updating their ‘dot plot’, which shows the outlook for future rates of each individual member. The new dot plot shows voting members view interest rates going higher, and staying there for longer, with FOMC member 2022 terminal rates expectation clustering in the 4.0-4.5% range and 2023 terminal rates clustering 4.25-5.0% range.

Before markets opened Friday, the United Kingdom announced sizable tax cuts to help with ongoing economic concerns and extensive energy price inflation. While such measures would typically be viewed as positive, international markets retreated due to worries that the extra money going to households will drive up spending and exacerbate inflation. Foreign exchange markets saw the Pound and Euro drop even further and the US Dollar gain more ground. Earlier in the week, Japan acted to bolster their currency as it, too, has slid extensively against the Dollar this year. Further, the Swedish Central Bank, Riksbank, hiked rates 1% to 1.75%, a more hawkish move than economists expected.

At home, jobs numbers continued to show strength. Costco reported earnings after the bell Thursday, meeting expectations, though shares still went down with the general sell off on Friday. Many S&P 500 companies have seen their earnings estimates for Q3 trimmed by analysts, leading to questions of whether markets have priced in much of the bad news along with current uncertainty or if there are more unforeseen negative developments coming and more room to the downside.

In geopolitical news, Russian President Vladimir Putin announced a partial mobilization of 300,000 reservists, causing protests across Russia. This comes on his threats of nuclear retaliation if Ukraine continues their efforts to regain occupied land. Italy saw election results from the weekend, with the right-of-center bloc set to win a majority in both houses and Giorgia Meloni preparing to be the nation’s first female Prime Minister.

Successful investors often talk about showing confidence in long-term time horizons, when uncertainty reigns. To paraphrase of a famous Warren Buffett quote: “Be brave when others are afraid, and afraid when others are brave.”  The meaning of the quote is that Wall Street often gives discounts when things are uncertain. The year 2020 may feel like long ago, but its lessons are good to recall. Hindsight may make it seem clear that holding, instead of selling, was the obvious answer. In real time, however, as we all watched markets plunge, riding out the storm was a scary endeavor. We also remember that markets bounced back much faster than anticipated. While the timetable will not be the same now, the principles will likely remain true.  As Hebrews 10:35 states, “So do not throw away your confidence; it will be richly rewarded.”

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