Investment Committee Meeting Highlights
The Fed reopened its more traditional toolset in March, increasing the Fed policy rate by 25 basis points, lifting rates from their zero-bound. A lot of attention has been focused on the Fed over the last several months as they wound down their quantitative easing (QE) programs and are now on pace for multiple rate hikes over the year. The focus will likely stay on the Fed as well as assessing the first quarter earnings season and how well companies can continue to operate in an environment with labor, supply chain, and inflation challenges.
In equity markets, March started out with bouts of volatility leading up to the Fed’s meeting in the middle of the month. Over the last half of March, the S&P 500 rallied to gain 3.71% over the entire month, erasing a 4.4% loss from the first couple weeks of the month. International markets significantly underperformed with developed international gaining 0.64% while emerging markets, being more sensitive to US interest rates and their currency impacts, fell 2.26%.
Anticipation of the Fed’s policy moves in March, coupled with rapidly rising expectations of future moves, pushed the short end of the yield curve higher throughout the month, creating headwinds for the bond market. Over the month the Bloomberg US Aggregate fell 2.78% with most of the losses coming from the first half of the month, ahead of the Fed’s meeting.
The first quarter of 2022 has come to an end, however market concerns with inflation and geopolitical tension continue. The FOMC announced a 25-basis point (0.25%) rate hike, which was anticipated and already adjusted for, as well as their forecast of future rate hikes for the coming years. Regardless of the initial rate hike, inflation is still anticipated to rise and there is little evidence to suggest that there will be any significant reduction in inflationary pressure in the short-term.
Inflation remains elevated compared to historical levels and therefore, The Federal Reserve has indicated that the next rate hike is expected to be more aggressive than previously projected. Over the last few months, we have seen expectations shift quickly and the market is now expecting multiple 50 basis point (0.50%) rate hikes this year. However, caution is needed as too aggressive of a rate hike in a short period of time can lead to a recession. A recession is highly unlikely in the coming months but should not be ignored as a possibility.
Looking at past yield curve inversions, we can see that the predictive power of these indicators are not perfect. While inversions do tend to prelude recessions, they may do so by a year or more, and sometimes nearly three years. Further, equity performance following inversions appears random and is not an indicator of future equity performance.
March offered investors some relief following a disappointing and nerve-racking start to the year, as markets were positive for the first time in 2022. Attention will be on how well companies can continue to weather the labor, supply chain, and inflationary environment or if these headwinds will begin to erode record high profit margins. In addition, job shortfalls continued to shrink with over 1.1 million jobs coming back into the economy throughout February and March.
Our market outlook for the rest of 2022 remains unchanged. There are good indicators signaling positive returns this year, but we may experience continued high levels of volatility to get there. Expected positive Q1 earnings, which will be released later this month, will offer a degree of recovery from the correction during the first couple months of 2022.
Current volatility levels could easily bring our forgotten 2021 fears back to the surface. However, our quantitative approach to portfolio management removes emotion-based investing and allows the data to guide our model strategies. Your portfolios continue to be recalculated bi-weekly ensuring that we are in the best position to achieve your financial goals.
This update is not intended to be relied upon as forecast, research, or investment advice, and is not a recommendation, offer, or solicitation to buy or sell any securities or to adopt any investment opinions expressed are as of the date noted and may change as subsequent conditions vary. The information and opinions contained in this letter are derived from proprietary and nonproprietary sources deemed by Hilltop Wealth Solutions to be reliable. The letter may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecast made will materialize. Additional information about Hilltop Wealth Solutions is available in its current disclosure documents, Form ADV, Form ADV Part 2A Brochure, and Client Relationship Summary Report which are accessible online via the SEC’s Investment Adviser Public Disclosure (IAPD) database at www.adviserinfo.sec.gov, using SEC # 801-115255. Hilltop Wealth Solutions is neither an attorney nor an accountant, and no portion of this content should be interpreted as legal, accounting, or tax advice.