Mr. Powell’s Wild Ride
Volatility has certainly increased as investors weigh a strong economy and record earnings versus inflation that is rising faster than anyone would like.
All eyes are on Jerome Powell and the Federal Reserve. Markets are anticipating four rate hikes in the coming year but also want to hear more about the Federal Reserves plan to end bond purchases and ultimately reverse course and reduce its balance sheet. In a perfect world, the Federal Reserve will have the opportunity to dictate how this happens, threading the needle so to speak, reducing government intervention and liquidity at a pace to not tank the economy.
The fear is that if inflation rises too quickly and that the federal reserve will be forced to accelerate the pace that they reduce course and ultimately shrink its own balance sheet. This would help to control inflation but at the same time would decrease liquidity in the economy. We have already seen a massive sell-off in crypto and high-risk assets.
While this will not solve supply chain issues or energy prices it may make people feel not as rich and reduce spending. The labor force participation is also a driving force with inflation fears. Will labor markets remain tight pushing wages higher or will we begin to see people come back to the work force? Will Jerome Powell and the Federal Reserve be able to thread the needle? Only time will tell, but all eyes will be on the Fed as their two-day policy meeting begins today.
There have been two noteworthy market updates that reveal how economists are divided. J.P. Morgan strategists headed by Marko Kolanovic said in a note to clients, “Recent bearishness in equities is overdone, and out of line with activity momentum, easing bottlenecks, and what we expect to be a strong earnings season,” while Wall Street’s most bearish analyst Morgan Stanley’s Mike Wilson said ‘Double down’ on defense because stocks will plunge another 10%.”
In times of extreme volatility, it is important to remember that investing over the long-term works. It also allows astute investors to seek out opportunities. Closed-end funds tend to present better opportunities in volatile markets as fear drives larger discounts. Maintaining a long-term focus while seeking opportunities will work over the long-term.
While corrections cause a lot of anxiety, it is important to remember that they are a normal part of the market.
In fact, a “correction” occurs on average once every 1.8 years. It is important during these times to both maintain a long-term view and avoid letting emotions guide your decisions.
As always, we remain available during these times to review your investment strategy and portfolio. Just give us a call at 610-825-3540 and we would be happy to talk.
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