I have been keeping a close eye on the market movements and particularly two themes have still maintained uncertainty in the last two months. Firstly, the timeline around when does the Fed hike interest rates and secondly the Russia-Ukraine situation. Multiple banks and Fed Presidents have chimed in with various different strategies, the common theme being a consecutive rise in interest rates to fight inflation. I believe the Fed will take a cautious approach with series of 25 basis points (bps) increase over the next few months to spread the negative impact rather than straight off go to a 100 basis points increase. This will be inline with the Bank of England approach to fighting inflation as well which raised 25 bps in February 2022.
Please see below the strategy of gradual uptrend in the interest rates by the Bank of England between Nov 2021 and 2022.
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| Source: Tradingeconomics.com (UK Interest Rates) |
At the same time, the US has held steady but I believe the trend to raise interest rates will be very similar to the approach it took in 2016.
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| Source: Tradingeconomics.com (US Interest Rates) |
Overall the S&P 500 is down roughly 9.33% since the start of the year. I believe the market correction that I was expecting has occurred as it was long awaited given the exorbitant values of some businesses. There may be a few more blips as the Fed pushes in the course correction in rates and I am hopeful the trends slowly start going green from there. There is still a great opportunity to put your extra cash at work and reap the returns in the long run from the markets.
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| Source: Google Finance |
New home sales have been up for the year overall but I do foresee some course correction happening seeing how the rates have picked up and given that home prices have not gone down significantly. Rental properties will still be a good source of revenue as rents have gone up and will gradually decline if and when we see a decline in inflation. Here's a look at the 30 year fixed mortgage rates for the last two years and you can see rates growing up swiftly.
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| Source: Federal Reserve Bank of St. Louis |
The approach I have taken for the last two months is investing heavily in the indexes and I have made a few significant investments to my crowdsourced rental portfolio. To be very honest, keeping cash on hand has been very hard for me seeing the buyers market at hand.
It will be interesting to see how the Russia-Ukraine situation turns out in the longer run. For the short term I have definitely seen a negative impact and the market reacting positively few times when there has been news for cooperation between or reduction in tension between two nations. Historically, majority of the tension or war events have been upward spikes for the US market in the long run (12 months later) looking at the last 10+ events. Here is some data to prove the fact [1] [2]. Similarly I believe in the long run the market to have course correction as earnings, GDP and job growth keeps improving in the US.
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