SHGA does not provide tax or legal advice. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. There is a risk of loss from investments in securities, including the risk of loss of principal. Information provided in written articles are for informational purposes only and should not be considered investment advice.
Meantime, we will continue to adjust portfolios to accommodate the changing underlying economic backdrop, staying diversified to weather the environment. In addition, as rates go higher, investors will be seeing additional interest income which has otherwise been sparse.Īt Sand Hill, we think that once the Fed has reached their objective, Goldilocks will again come out of the woods. consumer has a relatively healthy balance sheet, the job market is robust, and many are willing to spend as the pandemic leans towards an endemic. The good news is that absent the inflationary pressures at present, the U.S. The cash that does build up on the sidelines could function as a cushion to be deployed back into the markets when volatility subsides. Although there are periods of discomfort as volatility rises, it is not unusual that rate hikes cause investments to rotate across different sectors and vehicles within the capital markets.
The market continues to react to the shifting Fed monetary policy. The Fed intends to take an aggressive path ahead with more rate hikes to get back to, or above, a “neutral” zone to slow inflation. On February 18, 2022, the Fed approved a ¼ point Federal Funds interest rate hike, the first since December of 2018. Entering 2022, war in the Ukraine further fueled commodity inflation, turning the Fed into inflation slayers using monetary policy again, yet this time not to create inflation but to smother it out. What the Fed forgot is that when inflation is allowed to run hot, a flame could ignite which could be difficult to extinguish.Īs 2021 matured, the Fed capitulated, walking back the view that the rising inflation was transitory. The Fed felt compelled to further stimulate the economy, delivering a message that they were content to see inflation “run hot” for a while and that any excessive inflation would be transitory in nature. Deflation can be worse than inflation, particularly when interest rates are historically low.Įnter 2020, COVID caused the shortest recession in history, the Fed Funds rate was lowered to near zero, and the annual inflation rate pulled back to 1.2%. Many were of the belief that technological evolution was capping inflation, perhaps causing the Fed to fear deflation rather than inflation. However, in 2019, inflation slid back below the 2% target dropping to 1.8%. In 2018, inflation experienced a moderate year-over-year rise in inflation to 2.44%. Inflation was 2.1%, which in Goldilocks’ terms can be considered “just right”. Between 20, CPI ranged between 0.12% to 3.1% with an average of ~1.6%. inflation rate, as measured by the Consumer Price Index (CPI), was often stubbornly low versus the Fed’s target of 2%.
Although investment assets were inflating, the U.S.
In 2017, the global investment markets experienced a synchronous rise due to improving economic conditions, years in the making post the great recession. The present high inflationary environment has been stoked by multiple factors, a major aspect being low interest rates for an elongated period along with government stimulus. Although Goldilocks has taken a hiatus, that doesn’t mean the path to wealth preservation has eroded, but the trail does have more twists and turns. Given the paradigm change due to high inflation, and the Federal Reserve response, we are indeed in a different environment. Absent some blips, the financial markets enjoyed a Goldilocks environment for well over a decade, defined as a well-balanced economy supported by moderate economic growth and low inflation (not too hot, not too cold).
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