The Federal Reserve raised the fed funds rate this week by three quarters of 1% or 75 basis points. The Fed is aggressively raising interest rates to slow down inflation. They are also destroying demand and asset prices. There is another side to the inflation issue that we find ourselves in today and that is supply. Over the past 30 years the supply of goods has outpaced demand due to countries wanting to raise their standard of living through the production of goods. When the production of goods is more than the demand, prices remain stable, and inflation is not a problem. However, when governments(politicians) around the world forced businesses to shut down in March of 2020, production of goods/supply chains were destroyed. To add insult to injury the Fed injected over one trillion dollars of stimulus through buying bonds and Congress was handing out money to the tune of four trillion. The money creation along with irresponsible government spending has too much money chasing too few goods. Over the past six to twelve months demand has outstripped supply and that has produced higher prices(inflation) for goods.
Human behavior has never changed and often we are more extremely emotional about our money. We are going to have another event/flush that causes the volatility index to spike to levels that cause many retail investors to quit and not want to own stocks anymore. Think of October 2002, March 2009, and March 2020. Those periods saw the volatility index spike to extreme levels and stocks prices collapsed. We will see it again this time around. As tough and bumpy as this year has been so far, we have yet to see a major spike in fear. To say it another way, retail investors have been complacent for the most part and that is anything but normal. When we get the final push down no one will want to buy any stocks regardless of the quality or potential future returns. The average investor will swear off the stock market and choose the easy path of CDs at low rates. Often, after investors give up is typically the best risk versus return outlook for stock prices for many years ahead. Our advice going forward is patience and a longer-term perspective than day to day or quarter to quarter during this period. This too shall pass.
Best,
Matt
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.