Directional Change of Federal Reserve Impacts Markets
Recently, market participants have faced a directional change regarding their expectations of Federal Reserve (Fed) policy. Investors now have reason to believe that the Fed will implement more rate hikes in 2022 than originally anticipated. Due to the recent directional change in potential economic growth, market forecasters are now expecting U.S. GDP growth to decelerate. Additionally, market participants have experienced a directional change in fiscal policy. They are now not expecting the same degree of tailwind in fiscal policy as they saw in 2021 due to fading COVID-19 stimulus and post COVID-19 stimulus. Inflation pressures have also caused a directional change in consumer confidence and economic confidence.
This directional change has resulted in a change of premium that investors are willing to pay for risky assets. This is partly due to the recent shift in asset prices which has caused the investment landscape to become more uncertain than it was in 2021. This doesn’t mean that you shouldn’t have a formidable allocation of risk-based assets in your portfolio. What it does mean is that directional change in many data series should cause you to reduce your return expectations and prepare for more price volatility ahead.