Geopolitical Uncertainty in a High Inflation Environment
U.S. markets have been discounting higher interest from the Federal Reserve and it has been a see saw, well mainly in one direction since the beginning of the year. Last week, Russia officially invaded Ukraine and that has only created more uncertainty and that is one thing that markets do not like. So now markets are concerned about how many times the Federal Reserve will raise interest rates this year and how will the war in Ukraine impact global growth/profits. The S&P 500 index and Nasdaq are down around 8% and 12% respectively so far this year. If you look at the Nasdaq closer, tier two and tier three technology stocks are down 40-80% from their 52-week highs in 2021.
The Federal Reserve has a history of being behind the curve, meaning they are late to the game always. The Fed is in an unenviable position of maintaining price stability while maximizing employment with monetary tools. Last week the market had priced in six interest rate hikes this year. The markets are always looking forward to whether growth is expanding or contracting 6 to 9 months down the road. The Fed does the opposite. They look at old data from the past and make projections about the future. Since 1913, the Fed, has created problem after problem. The 10-year treasury is up a full percentage point from January of 2021. The marketplace has done a lot of the heavy lifting for the Fed already.
Going forward, if the Fed pauses or slow walks the rate increases this year then we may be setting up for a big rally in the stock and bond market. Again, technology/biotechnology stocks have been hammered since November of 2021. If you have more than a two-year time horizon it may serve you well to invest in tier two and tier three technology stocks. They will more than likely lead as we move into the second half of 2022.
The views expressed are not necessarily the opinion of Cadaret Grant, and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investing is subject to risks including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.