By: Jeff Anderson, CFA
This Week: Markets closed lower for the week, as investors digested news surrounding the spread of Omicron variant, the Fed’s announcement of accelerating its bond tapering program, and inflation numbers. Despite consensus indicating multiple interest rate hikes next year, the 10- and 20-year US treasury bond yields declined. That has left more than a few strategists scratching their heads. The yield curve has been flattening which typically indicates lower economic growth in the future. GDP will likely stay elevated for the first half of 2022, but as the Fed tightens monetary policy, GDP will likely settle back down to its long-term average of 2 to 3 percent.
Crude oil lost 2.16% for the week yet is till up over 45% for the year. Inflation fears were outweighed by fears that the Omicron variant will slow global growth in addition to OPEC agreeing to boost supply.
|Close||Weekly return||YTD return|
|US Treasury 10yr Yield||1.41%|
Source: Wall St. Journal
- Market Update
- The Federal Reserve to Taper More Aggressively
- Buying High and Selling Low. One of the 4 Defects in our Financial DNA
- Putting the IPO Market in Perspective
The Federal Reserve to Taper More Aggressively:
During Wednesday’s FOMC meeting, Fed Governor Jay Powell said the Fed is likely to increase the pace of tapering bond purchases and could be complete by March 2022. This puts the March meeting as a potential timeframe for the first interest rate hike in years. The futures markets are pricing in roughly three rate increases next year. With unemployment rates low, the focus is inflation. The US economy had been unable to generate inflation above 2% for over a decade. The Fed has been willing to let inflation run a little hotter than normal as the threat of deflation outweighed inflationary fears. Now, inflation is running hot, and the Fed is signaling a policy shift towards tighter monetary conditions. The Fed governor, despite the criticisms, has been willing to change direction much quicker than previous governors. However, according to Powell, the criteria for rate hikes is different than for accelerated bond purchase tapering.
Buying High and Selling Low. One of the 4 Defects in our Financial DNA:
Morningstar’s Amy Arnott, CFA wrote an interesting piece on how not to invest (link at bottom of paragraph). Despite the poor performance of famed investor Cathie Wood’s ARK flagship ETF, ARK Innovation ETF, investors have fared worse. Much worse. Why? They chased performance. Buying the ETF “after” the fund generated exceptionally strong, multi-year returns. To compound matters, these recent investors turned around and sold as the fund started generating negative returns. In Morningstar’s “Mind the Gap” annual study, they found that for the most recent 10-year period ended December 31, 2020, investors earned almost 2% less per year compared to the returns of the funds they invested in. This is not a knock against ARK or Ms. Wood. It is simply an example of how many investors behave, which can have material consequences to building wealth.
Putting the IPO Market in Perspective:
To say 2021 was a good year for companies going public would be an understatement. Including SPACs and Secondary Offerings, as of October 31, 2021, 755 deals were completed valued at $214 billion. From the attached chart, these figures were above the previous peak period of 1999-2000. Companies (and their Investment Bankers) like to go public when markets are rising, and sentiment is high. Interestingly, over a two-year period, 2020-2021 total deals were not that much higher than the 1999-2000 period. Historically, market returns after big deal years tend to be lower, or even negative. Having a well-diversified portfolio of domestic and international equities as well as fixed income securities with a long-term horizon can mitigate the effects of market corrections.