“When the time comes to raise interest rates, we’ll certainly do that, and that time, by the way, is not anytime soon.”
- Jerome Powell Federal Reserve Chairman. 2021

On behalf of our entire team at Williamson Wealth Management, I want to thank you for your business and trust in this difficult market.

This year’s story has been the Federal Reserve’s reaction to inflation. It has ratcheted up the Fed funds rate from .25% in March to 3.75% in November. This was the fastest pace since the fall of 1980, when the fed funds rate leapt by 10% in just six months to 19%. The Fed would rather avoid the mistakes of the early 1980’s and be aggressive now, rather than be forced into a more aggressive posture later on.

As of this writing, the markets have reacted negatively to the rate hikes. The S&P 500 is down 15.7% this year. Simultaneously, this year the bond market is down 18.4%. In the history of the United States of America (since 1788), do you know how many times the stock market and bond market have been down over 15% at the same time? The answer is NEVER! Wars, earthquakes, presidential assassinations, plagues, riots, whatever. In 234 years, it has never happened. The reason it hurts so much more this time is because everything we own to smooth out the portfolio volatility is considerably down in value.

Of course, this is all illogical because both sides can’t be right, but it is the world we live in today. Why is it happening now? My guess is that this is the first time in history that we have had so many news outlets telling people that whatever they fear the most, will happen.

My job is to help clients plan for the long term, not to be a media critic. My point being- when people sell across the board regardless of quality, or value, or price- this is when opportunities arise. The stock and bond market corrections represent one of the best buy opportunities in years.

While the global equity markets enjoyed three years of upside performance from 2019- 2021, it wasn’t without volatility. If we look past the headlines, stocks respond to short term headlines, but you should stay focused on your long term goals. If you are finding

that the recent market decline is forcing you to rethink your risk tolerance, timing isn’t a successful strategy and our goal is to come out of this current decline successful and on track for your long term planning needs. That focus should help remove some of the emotional component that encourages too much risk when stocks are surging and discourages one from panic selling when markets decline.

The FED-

The Fed’s 180 degree turn from doing whatever it takes to support the financial markets in 2020 to doing whatever it takes to depress the financial markets in order to cool inflation has been the primary reason behind the huge shift in the underlying environment we’ve witnessed over the past year. It was last November when the Fed first changed their tune and began to alter their rhetoric, a process that has subsequently resulted in a historical pace of rate hikes. It’s no coincidence that it was also last November that the more growth-oriented areas like the NASDAQ 100 and Russell 2000 peaked. To put this into perspective, during the last hike cycle that began in 2015, it took almost three years for them to raise the fed funds rate from .25% to 2.5% before the markets started to tumble and they panicked. Now, in 6-7 months, we’re already at 3.75% Fed Funds rate and the expectation is for a least a few more hikes in the months ahead. (Saut Strategy)

It’s unusual for a Fed chief to use the word ‘pain.’ It was carefully selected in a prepared speech and it wasn’t an off the cuff remark. In recent years, rate hikes were communicated in gentle terms, but it’s different this time and the Fed seems intent on squashing the very inflation it helped create and our economic growth at the same time. Yet, it would be unfair to blame high inflation completely on the Fed. Trillions of dollars in fiscal stimulus, pandemic lockdowns, and supply chain woes have also contributed to price pressures. The Fed is tasked with cleaning up the mess and it wants to avoid the mistakes of the 1970s and 1980’s, when monetary policy was inconsistent, and inflation became embedded in the fabric of our economy. In its view, it’s better to take a tough stance now rather than be forced into even harsher measures down the road. While there is no mention of a recession in Powell’s speech, past talk of a soft economic landing was absent.

The central banks is intent on getting inflation back to 2% is an obtainable goal, but it’s a steeper hurdle that will require more harsh medicine that has become a big part of the Fed’s anti-inflation playbook. The Fed also runs the risk it could spark undue hardship in financial markets, as products created when rates were lower collide with today’s higher rate environment. It’s because of the Fed’s action that the markets have reacted accordingly.

GDP-

The Atlanta GDPNow model estimate for real GDP growth in the fourth quarter of 2022 is 4.2%. (Atlanta Fed’s Economy Now) 2022 Real GDP growth will come in at 1.8% year over year. Global growth is forecast to slow to 2.7% in 2023 from 3.2% in 2022. (International Monetary Fund)

Earnings

Analysts are projecting S&P 500 earnings growth of 5.2% for the full year 2022. Analysts are projecting 5.7% earnings growth in 2023. (Factset Earnings Insight)

Your financial plan isn’t set in stone. Any number of circumstances and changes in your personal situation may require a mid-course correction. A disciplined approach has proven to the most effective path to reaching one’s goals. From a big-picture perspective, while the volatility makes it hard to believe, the markets have moved sideways since May/June and the longer term secular bull market will continue as the Fed pivots and stops rate hikes.

As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor. I’m here to assist you and to answer any questions you might have in regards to financial planning, the markets or walk through any issue that concerns you. As always, thank you for the relationship and trust.

Harry S. Williamson, WMS
Vice President, Investments
Financial Advisor

Any opinions are those of Harry Williamson 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. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S .stock market.

The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. The NASDAQ-100 (^NDX) is a stock market index made up of 103 equity securities issued by 100 of the largest non-financial companies listed on the NASDAQ. It is a modified capitalization-weighted index. It is based on exchange, and it is not an index of U.S.-based companies. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Prior to making an investment decision, please consult with your financial advisor about your individual situation.