It has been an interesting start to 2022. Market volatility and rising interest rates have wreaked havoc on the stock market and will continue to do so for most of 2022. Recent announcements by the Fed indicate a plan to be more aggressive in combating inflation. So, what does this mean for investors?
We can expect a general market pullback, as the Fed interest rate policy will slow down a hot and growing economy. We have already seen a pullback in the equity market with the S&P index down approximately 13% YTD. The sector that has been affected most by the Fed’s announcements has been the technology sector, which can be seen in the NASDAQ index (down almost 20% YTD). The main reason is that technology companies are typically highly leveraged, and rising interest rates impact the cost of carry on that debt. While market pundits still debate how many interest rate hikes we will see and how large they will be, there is a consensus that interest rates will be significantly higher by the end of the year.
From an investment perspective, this means that investors should be cautious in their strategies and do more research on the sectors that typically do well in a rising interest rate environment. Two of the primary sectors that benefit from a rising interest rate environment are energy (the only sector that is positive YTD at 37%) and financials. There are others to consider as well. The housing sector will be impacted negatively as the cost of purchasing a house becomes more expensive due to higher rates. Caution is the name of the game for investing in 2022 and the near term.
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