April Market Insight
After completing their bond-buying “taper” program last month, the Federal Reserve increased rates by a quarter point for the first time in four years. Some investors are now expecting the Fed to initiate half-point increases (50 bps rather than 25 bps) at the next two Fed meetings. This would be the first 50 bps hike in 22 years. We have stated in the past that the Fed typically prefers to socialize their intent well before taking action so that investors are rarely surprised when actual changes are implemented. In recent weeks we have seen numerous Fed officials state that 50 bps hikes may be needed to help slow inflation. This gives a higher level of credibility to what may be in store. The lingering impact of Covid-19 supply chain disruptions and the completely unexpected Russian invasion of Ukraine combined to generate the worst inflation in 40 years. The Fed has to act so that stagflation, the combination of rising inflation and slow economic growth, does not materialize. In our view, the open market is appropriately reacting to the Fed’s interest rate comments. Further, we believe much of the upward movement in rates is behind us rather than ahead of us. U.S. economic fundamentals remain positive with a strong labor market creating strong consumer spending. After record setting earnings for the S&P 500 were reported in 2021, 2022 earnings could be nearly 10% higher. Despite unexpected events and uncertainty, the U.S. markets have been remarkably resilient.