The market woke up on the first trading day of the year, January 3^rd with a massive hangover from 21 months of indulging in low interest rates, easy monetary policy, and massive amounts of cash in the economy.  The Federal Reserve has signaled it will start to raise the Fed rate in 2022 and slow their vast amount of bond purchasing they have been doing.  They signaled this before the first of the year, but the market seemed to shrug this off as it was busy with holiday cheer and December had a nice Santa Claus rally in the markets.

Then after New Year’s, the market realized reality and it’s back to work with less government intervention and higher rates and how will the bond and stock markets look with this new reality?  Well, that is what the past 3 weeks have brought, is trying to shift through this new reality and the 10-year Treasury jumped from 1.52% at the end of the year to 1.83% at the time of this writing. 

Historically, this is a huge jump in such a short time.  Companies that have been accustomed to borrowing at such a low cost, now have an increased cost of borrowing which cuts into earnings.  This is especially so for highly indebted companies such as the ones that ARK Funds owns (ARKK) and a big part of the reason this fund is down 19.79% already in only 20 days of 2022. 

Higher interest rates also hurt the bond market.  When interest rates rise, the value of bonds decrease as investors are attracted to new bonds that pay more.  This is shown in a long-term treasury bond ETF (VGLT) that is down over 4% in the same 20 days in 2022.  The longer it is before the bond matures, the more it affects the value when rates rise.

The rise in rates and tightening of monetary policy is no shock, the pace so far in 2022 is a bit surprising.  However, at Capstone in late spring and early summer of 2021, we made some changes to try to help with this upcoming hangover.  We shifted much of our bond exposure to short term bonds (ones less impacted by higher rates) and we have always had limited exposure to highly indebted, speculative companies, but reduced that small exposure even further.

This by all means does not mean that our portfolios have avoided the downturn so far in 2022 as most sectors of the market have been negatively impacted.  However, we believe in a diverse portfolio as a few sectors such as the floating rate, natural resource and commodity funds we use, are actually up year to date, helping also to soften the blow.  We will continue to watch the changes in the market and economy as we adjust to the new landscape and hopefully get on the other side of Covid relatively soon.

As always, if you have any questions, concerns on your portfolio or overall financial planning with your own Financial Fingerprint, reach out to us anytime. 

 

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/TextView.aspx?data=yieldYear&year=2022