Federal Reserve Chairman Powell and Omicron gave the markets a one-two punch last week. The markets acted as expected upon the Omicron discovery, with a minor pullback the Friday after Thanksgiving.
Then Powell suggested the term “transitory” inflation be retired, after he insisted it was accurate for the last 7 months. Powell then suggested the monthly $120 billion of bond purchases may end much sooner than next June, leaving many to believe rate hikes are only around the corner.
The result, a weekly drop in the major stock indexes. The Dow Jones lost a mere (.76%), the S&P 500 (1.18%), the Nasdaq Composite (2.60%) and the Russell 2000 (3.82%). Pure technology stocks got hit the hardest as the thought of rising rates will hurt technology stocks first.
Foreign stocks for the week were down (.94%) however Emerging Market stocks rose .20%.
Bond Conundrum, Again?
Do you recall when Alan Greenspan was raising rates .25%, each meeting, during the period of 2004 through 2006? Short term rates increased from a low of 1% to 5.25%, however longer-term yields did not respond and stayed low. Greenspan called this a “conundrum!” Well, by the 3rd quarter of 2007, the housing market and mortgage bonds imploded.
Let’s look at last week after Powell’s news blast…. Short term, 2-year Treasury rates rose as high as .65% before closing on Friday @ .595%. The 2-year rate started 2021 with a yield of .12%.
Our 10 Year US Treasury rate dropped last week, closing on Friday @ 1.34%. The 10 Year rate started 2021 with a yield of .91%. The high for the year was on approximately 3/31/21 @ 1.75%.
Is the yield curve (the difference between 2 year and 10-year rates) suggesting inflation and growth will moderate next year? Definitely like to have the crystal ball for that answer!! As always, time will tell!!
What To Do Now?
Historically when the Fed begins to pull back liquidity, the market responds favorably during the early phases, until the Fed goes too far, raising rates.
It’s very important that current and soon-to-be retirees know exactly how you’ll get your income during this potential tightening phase. You do not want to be forced to sell assets at an inopportune time to meet your known income needs.
I suggest having your needed funds positioned appropriately for income, and not being overweight in stocks or bonds in your portfolio.
A well-diversified and allocated portfolio positioned specifically to your income needs is critically important to achieving peace of mind.
For non-clients, if you would like an objective opinion of your planning and investments, please reach out to our office to schedule a complementary consultation. You can schedule on our website by clicking HERE, or call Ellen at 856-354-3200 ext. 205.