The early days of 2022 have been difficult for investors. After months of inflationary pressures, the Fed is poised to begin raising interest rates and scale back their bond buying. Bonds were the first to react and major bond indexes saw losses last year. Equity markets have begun their declines in the past few weeks. Without low-cost debt, equity investors believe companies will face difficulties matching the strong earnings growth seen in the past few years. This is particularly true for technology companies, which were highly priced in anticipation of years of continued growth.
Inflation may be the reason why the Fed is beginning rate increases, but the reality is the economy has come a long way since the COVID caused recession of 2020 and there is little need for continued Fed support. Recent history shows us equity markets can still do well in times of rising interest rates. The Fed raised interest rates from 2016 to 2018 and equity markets averaged 9% per year during this time. However, equity markets were less expensive than they are today, and it may be difficult to achieve similar results over the next few years.
Alan Bergin is the Senior Vice President of Fund Evaluation Group in Dallas, TX, the Foundation’s consulting firm.