Marc Cuniberti The markets continue to remain volatile, with a current downward bias being prominent since the start of the year.
Investors are likely experiencing the rare but excruciating pain of seeing balances continuing to erode, seemingly in an endless daily parade of red numbers and dropping balances appearing on their investment screens.
Much of this many say is the fault of policymakers, both in addressing the CoVid crisis and the massive amount of money creation given out to consumers and businesses alike to address it.
I would say much of what we are seeing now in the markets is not the fault of anyone person but the fault of many.
This analyst has always maintained the position that the CoVid virus could not be stopped, that shutdowns did nothing but destroy many businesses and livelihoods, and that shutdowns actually prolonged the crisis by allowing a longer virus survival time which in the end caused more mutations. So far, at least on the surface, that statement seems correct.
That said, others claim shutdowns helped limit the damage that would have been much worse had we not had them. They use science as their argument. Detractors claim the scientists have been wrong so many times during the crisis that they are not to be believed.
It’s impossible to go back in time and take the opposite route we took, and then compare the results side by side. What we can discern is that the current events certainly don’t confirm the decisions world governments made were the correct ones.
Fast forward to our markets, and the issues believed to be responsible for the market’s current ills are Russian aggression on the Ukraine border and the worst inflation in decades.
Although the U.S. holds no blame for what Russia is doing, the inflation part is argued to be the result of the overly generous unemployment, bailout and stimulus programs instigated to address the CoVid slowdowns and shutdowns.
Whereas the Russian crisis is serious and has taken the spotlight off of inflation and the Federal Reserve’s predicted actions to address it, in my opinion, inflation is the real threat. The Russian crisis may pass without culminating in a major event.
In my opinion, what the Fed does to address inflation is the real threat to market upward momentum. To address inflation, the Fed will raise interest rates. The Fed has indicated that they are very concerned about the rate of inflation and will start to raise interest rates as soon as this March. Uncharacteristically, they have indicated that at least a one percent increase will be accomplished by a quick succession of smaller increases. Following the markets for as long as I have, the fact that they have mentioned one percent as a minimum should be taken seriously.
Should investors be worried? Obviously, the continued erosion since the start of the year has taken a big bite out of the markets.
The markets, however, historically, can on occasion, act positively to a rate increase period, once the increases are underway.
From KENSHO STATS, and as mentioned on CNBC, looking at six periods of rate increases since 1988, the results from the start of the interest rate increases event until the increases stopped, information technology stocks gained 47%, consumer discretionary (luxury nonessential items) were up 31%, financials were up 30%, industrials were up 29% and materials went up 27%.
What this indicates is that although rate increases by the Fed are initially taken very seriously by investors (there have been many instances where rate increases have initially hammered stocks) there is some historical precedent that may give some hope to investors that are now running scared.
Rate increases can lead to a rising stock market once the stigma of a rate increase has passed.
As for the Russian crisis?
In my opinion, it’s likely a nonevent, although it is moving the markets at this time.
Investors should focus more on the interest rate event, which may eventually have a positive effect on the economy and therefore the markets.
“Watching the markets so you don’t have to”
Past performance is no guarantee of future results. No one can predict market movements at any time. This is not a recommendation to buy or sell any securities. This article expresses the opinion of Marc Cuniberti and may not reflect the opinions of this news media, its staff, members or underwriters, nor any bank, brokerage firm or RIA and is not meant as investment advice. Mr. Cuniberti holds a degree in Economics with honors, 1979, from SDSU. His phone number is (530)559 -1214.
