Markets “In a Nutshell” for November 21, 2022
Investment Week at a Glance
Stocks finished lower for the week. The Dow Jones Industrial Average was flat, the S&P 500 was down 0.70%, and the NASDAQ fell 1.60%. Foreign stocks (MSCI EAFE) were also down, falling 0.90%. Bond prices were down for the week, with the 10-year U.S. Treasury ending the week at 3.83%. (Data source: Wall Street Journal)
Equities When Fed Pauses Rate Hikes
Although it is expected that the Fed will continue rate hikes in the near future, these hikes will most likely be smaller. Once the Fed sees inflation comes down and the rate hikes are doing their job, the Fed will then most likely pause its rate hikes. Although it is uncertain when this will happen, it does seem clear that we are nearing the end of this cycle of rate hikes. When we do reach that point, equities tend to perform well as they are able to know what rates will look like. The previous 4 times the Fed paused raising rates, equities saw a 10.4% gain while long-term bonds saw a 7.5% gain, This would be good news for investors as so far this year both stocks and bonds have been down double digits for most of the year.
Is Fixed Becoming More Attractive?
Although rising rates have caused stocks and bonds to be hit hard this year and leave investors nowhere to hide, we now are seeing new bonds issued at a much greater yield than previously. While the real return has climbed rapidly as rates rise, the inflation-adjusted return for bonds is still not that attractive. With bonds and CDs paying in the range of 3%-4% currently, they still lag inflation by about another 3%-4%. However, with bonds now paying much higher interest than we have seen recently, this allows fixed-income investors a chance to reinvest in bonds with higher yields. As we have seen rising inflation hurts both stocks and bonds, the opposite is true for declining inflation as both stocks and bonds tend to perform well as inflation declines which give hope to investors going forward.
How many times has the Fed raised rates this year? (Scroll Down for Answer)
Have a Great Week!
4) 6. The Fed has raised rates 6 of the 7 meetings so far in 2022 and will most likely raise them in the last meeting in December making it 7 of 8 and bringing the Fed Funds rate over 4%.