Russia, Interest Rates, & the Market
We’ve been seeing a lot of fluctuation in the market lately. Most likely, it’s been reacting to the recent conflict between Russia and Ukraine. Since we don’t know how that conflict will end, we don’t know how the market will react. We’ll have to wait and see what happens in the future.
Beyond the market fluctuating based on geopolitical events beyond our control, we’re also contending with inflation. At 7.5%, inflation is higher than it has been for 40 years—it had been hovering around 2% or 2.5% for a while, so this has been a big jump. Even though it’s been a long time since we’ve seen anything on this scale, I don’t believe that there’s going to be runaway inflation. The Federal Reserve used to say that inflation was transitory and stemmed from supply chain issues. However, that’s not what’s happening now; today’s issues are related to M2, or the money supply.
"Long-term investors believe that the Fed can wrestle inflation with relative ease."
M2 is essentially what we as an economy have in the bank as spending dollars. For the past decade, M2 has been growing at a steady rate of about 6%. However, According to First Trust Portfolios, the M2 supply has gone up by a whopping 40% since the pandemic. That’s a huge amount of money coming directly into consumers’ hands.
Though inflation appears here to stay for a while, the good news is that long-term investors believe that the Fed can wrestle inflation with relative ease. They calculate what the average inflation rate will be five years from now using the Five-Year Forward Inflation Expectation Rate. The Fed says that in five years, the average will drop to around 2.5%. We believe that’s true, but rates are going to increase for the time being.
There is a big difference between a tight Fed and a loose Fed. If the Fed raises 125 basis points in 2022, it won’t be a tight Fed but rather just less loose than it was. In our opinion, it’s time. Rates have been too low for too long.
We also expect that longer-term rates will not have an equal reaction to the rise in shorter-term rates. They will go up for sure (that will be a headwind for equities), but earnings should more than offset those increases for 2022.
If you have any questions or comments about what’s going on in the market, don’t hesitate to reach out to us by phone or email. We’d love to hear from you.
The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the author, and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct.
Every investor's situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of the strategy selected. The foregoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision. .