Interest Rates Drop As Equity Market Volatility Picks Up
The tremendous volatility in the equity market, bond market, and crypto markets is making investors nervous. However, these asset classes have all experienced outsized pricing gains over the last several years so the pullback while painful, may be healthy for the long-term durability of the markets. What has been driving this volatility? A big reason for the pick-up in volatility and re-pricing of certain parts of the market is the Fed’s signaling that it will no longer be ultra-accommodative. Markets have come to expect the so-called “Fed put”, and it appears that the Fed is removing that safety measure from the market as it focuses on taming inflation. Also, a slowing global economy and slowing earnings growth have Wall Street analysts adjusting forecasts downward as the U.S and global economy bounce back from a once in a century event.
Assuming that this last wave of the Covid virus (called Omicron) creates durable herd immunity, in addition to, the many treatments now available, the U.S. should start to see a return to normal life within the next few months. This return to normal will dramatically help reduce supply chain issues and employment shortages, and, hopefully, coupled with the Fed tightening reverse rising inflation. Rising interest rates (should higher rates stick) will also help new buyers of real estate be in a better negotiating position with sellers. While higher rates will cap the home prices ascent, especially after such big gains in housing the last year, it is important for the long-term stability of the housing market that prices don’t move up faster than incomes. Yet, housing inventory remains very tight so there is little concern that housing prices will go lower by any significant amount even in the face of rising interest rates.
Keep watchful eyes on Ukraine – U.S. tensions, ongoing earnings reports from big tech, and a flattening yield curve. The world is a complex place and for the moment the markets are in a negative mood.