April 2022 Market Commentary
April 14, 2022 by Interchange Capital Partners
By Chris Duerr, CFA® CFP®
A significant increase in volatility and a commensurate decline in market visibility characterized the first quarter of 2022. Stock and bond markets fell amidst a major shift in monetary policy and Russia’s troubling invasion of Ukraine, both of which create lasting implications for portfolios and asset allocation.
For the first time since December 2018, the Federal Open Market Committee (FOMC) voted to raise the Federal funds target rate range by a ¼ percent to 0.25%-0.50% at its March meeting. The decision was widely anticipated. What was surprising was the Fed’s stated goal to raise the fed funds rate from 2% to nearly 3% by the end of 2023, communicating that further rate increases are necessary to tame inflation.
The war in Ukraine has exacerbated price pressures and presents additional upside risks. The supply shock in many commodities ranging from oil and gas to food ingredients has added pressure on central banks to toughen their stance.
While it is easy to see why the Fed shifted its posture given the recent data and impacts of war, the economic outlook may be telling a different story. While still above trend, growth is likely to slow this year causing demand to potentially moderate. The factors that boosted inflation—including the reopening from Covid and fiscal stimulus—have mostly faded. A substantial portion of today’s elevated inflation can be attributed to pandemic-specific factors, including economic reopening and problems with supply chains.
Since inflation today is being driven by supply constraints and backups, the dynamics are different from the demand-driven inflationary bouts in the recent past. The challenge for central banks is monetary policy cannot stabilize both inflation and growth—it must choose between them. Central banks should seek to reassure that they are not only aware of growth risks, but also that their policy decisions will not unduly raise those risks.
As the Fed tightens policy, it may be useful to consider how markets behaved in past rate hiking cycles. Since 1983 there have been six hiking cycles, lasting 18 months on average. There are a few key takeaways:
- In every hiking cycle, short-term rates rose faster than long rates. This creates a challenging environment for traditional fixed income as rates increase across the yield curve.
- Equities tend to perform well as hiking cycles take place when growth is still strong.
While our allocation views acknowledge the reality of slower growth, they stop short of positioning for a recession in the near term. Economic growth remains above trend, earnings estimates are proving resilient, consumer balance sheets/spending remain healthy, the labor market is stable and corporate defaults/bankruptcies remain low.
Within our Spend, Live, Give (SLG) framework our allocation views are as follows:
Spend (Time Horizon: 0-3 years): Maintain Lifestyle
- Maintaining higher cash levels than normal due to increasing short-term interest rates
- Monitoring for opportunities to invest cash at higher yields
- Adding high quality floating rate bond positions
Live (Time Horizon: 3 years-End of Plan): Improve Lifestyle
- Remaining overweight US equities and pausing on further additions to international developed equities
- Decreasing exposure to economically sensitive sectors and increasing exposure to high-quality companies that can thrive in difficult economic and market conditions thanks to strong, proven business models
- Underweight fixed income in preference for liquid non-traditional assets to provide downside protection and generate uncorrelated returns
Give (Time Horizon: Lifespan): Improve Lives of Others
- Holding positions in disruptive innovation stocks tied to long-term secular changes
- Using volatility to increase cryptocurrency exposure
- Neutral on emerging markets and keeping an eye on COVID 19 developments/monetary policy in China
- Allocating to private markets which have the potential to add value and diversification
Chris Duerr is the Senior Director of Investments for Interchange Capital Partners. In this role, he has comprehensive responsibility for economic analysis, developing investment strategy and process, and making decisions on asset allocation, selection of external managers, and risk management across portfolios.
Throughout his career, Chris has demonstrated a commitment to better serve clients by earning several advanced certifications. He is one of less than 3,000 financial professionals to hold the Chartered Financial Analyst ® (CFA®) and CERTIFIED FINANCIAL PLANNER™ credentials. Respectively, each credential is widely recognized as the standard of excellence in investment management and personal financial planning. Most recently, Chris became a Certified Exit Planning Advisor (CEPA) to engage business owners more effectively in maximizing transferable business value, ensuring financial preparedness, and purposefully planning for the next chapter of their lives.
He graduated with honors from the University of Pittsburgh with dual degrees in economics and marketing and a minor in history. After spending several years at another major financial services firm, he joined Ahmie and the team in 2013.
Chris lives in the Fox Chapel area with his wife, Helen, and daughter, Heidi. Outside of work, you can find him spending time with family, on the golf course, or at the top of the Peloton leaderboards. To learn more about Chris, connect with him on LinkedIn.
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