Weekly Market Update with Brian Ransom 18 March 2022
Weekly Market Update: First Round of Rate
Welcome to the weekly market update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this week.
Two weeks after the start of the war and 2 1/12 months since the start of the year, volatility continues and the market is down 8% from all-time highs. Depending on what the market does today, the S&P could break out of the 2 month long down trend or continue in its downward trajectory.
Europe continues to dominate the news headlines this week with Russia pushing on the Western borders of Ukraine. Early hopes of a peace agreement appear dashed. And for the first time since 2018, the Federal Reserve has elected to increase interest rates 25 basis points or .25%.
Typically, when the Fed increases interest rates, this can cause an increase in volatility in the stock market as the world adjusts to tighter monetary policy. As we saw in 2015, increased volatility coincided with the first rate increase since the global financial crisis. Often, the Fed can raise rates a bit too quickly to combat inflation causing a second round of volatility like we saw in late 2018. But these rate increases allow the Fed to inject liquidity into the market should economic headwinds like the coronavirus emerge. The question is, with 7.5% inflation, how quickly and how high will the 2022 rate increase go?
Based on futures, the bond market is currently predicting a 60% chance of one rate increase or a 25 bps by May with a 40% chance of 2 hikes. By the end of the summer, the same futures market is predicting a 37% chance of 3 rate hikes and a 47% chance of 4. And by the end of the year, the market is predicting a 40% of 6 rate hikes and a 47% chance of more than 6 increases. As a comparison, the 2015-2018 rate increase took 2 years to reach 6 rate hikes. Therefore, the market is expecting a much more accelerated process of monetary tightening from the Federal Reserve. Now, it should be pointed out that this futures market is miserable at accurately predicting rate hikes. But, currently the bond market is expecting a very hawkish Federal Reserve.
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Sources:
1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved March 18, 2022, from FactSet Database.
2.FactSet Research Systems. (n.d.). S&P 500 & Fed Funds Target Rate (Interactive Charts). Retrieved March 18, 2022, from FactSet Database.
3.FactSet Research Systems. (n.d.). Policy Rate Tracker (Markets). Retrieved March 17, 2022, from FactSet Database
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