Following the post-COVID stimulus hangover in 2022, the bull market has continued to run. One of the key factors was the Federal Reserve’s decision to
Goldilocks Heads Back into the Forest
Published Date : April 29, 2022
April 29, 2022
Absent some blips, the financial markets enjoyed a Goldilocks environment for well over a decade, defined as a well-balanced economy supported by moderate economic growth and low inflation (not too hot, not too cold). Given the paradigm change due to high inflation, and the Federal Reserve response, we are indeed in a different environment. Although Goldilocks has taken a hiatus, that doesn’t mean the path to wealth preservation has eroded, but the trail does have more twists and turns.
The present high inflationary environment has been stoked by multiple factors, a major aspect being low interest rates for an elongated period along with government stimulus. In 2017, the global investment markets experienced a synchronous rise due to improving economic conditions, years in the making post the great recession. Although investment assets were inflating, the U.S. inflation rate, as measured by the Consumer Price Index (CPI), was often stubbornly low versus the Fed’s target of 2%. Between 2010 and 2016, CPI ranged between 0.12% to 3.1% with an average of ~1.6%. In 2017, U.S. Inflation was 2.1%, which in Goldilocks’ terms can be considered “just right”.
In 2018, inflation experienced a moderate year-over-year rise in inflation to 2.44%. However, in 2019, inflation slid back below the 2% target dropping to 1.8%. Many were of the belief that technological evolution was capping inflation, perhaps causing the Fed to fear deflation rather than inflation. Deflation can be worse than inflation, particularly when interest rates are historically low.
Enter 2020, COVID caused the shortest recession in history, the Fed Funds rate was lowered to near zero, and the annual inflation rate pulled back to 1.2%. The Fed felt compelled to further stimulate the economy, delivering a message that they were content to see inflation “run hot” for a while and that any excessive inflation would be transitory in nature. What the Fed forgot is that when inflation is allowed to run hot, a flame could ignite which could be difficult to extinguish.
As 2021 matured, the Fed capitulated, walking back the view that the rising inflation was transitory. Entering 2022, war in the Ukraine further fueled commodity inflation, turning the Fed into inflation slayers using monetary policy again, yet this time not to create inflation but to smother it out. On February 18, 2022, the Fed approved a ¼ point Federal Funds interest rate hike, the first since December of 2018. The Fed intends to take an aggressive path ahead with more rate hikes to get back to, or above, a “neutral” zone to slow inflation.
The market continues to react to the shifting Fed monetary policy. Although there are periods of discomfort as volatility rises, it is not unusual that rate hikes cause investments to rotate across different sectors and vehicles within the capital markets. The cash that does build up on the sidelines could function as a cushion to be deployed back into the markets when volatility subsides. The good news is that absent the inflationary pressures at present, the U.S. consumer has a relatively healthy balance sheet, the job market is robust, and many are willing to spend as the pandemic leans towards an endemic. In addition, as rates go higher, investors will be seeing additional interest income which has otherwise been sparse.
At Sand Hill, we think that once the Fed has reached their objective, Goldilocks will again come out of the woods. Meantime, we will continue to adjust portfolios to accommodate the changing underlying economic backdrop, staying diversified to weather the environment.
Articles and Commentary
Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.
Video Presentations
All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
Other Posts By This Author
- – Can the Bull Market Continue to Run?
- – When Macro Overwhelms the Micro
- – Weight a Minute: Will GenAI Transform Your Figure?
- – Welcome Back to an Economic Cycle
Related Posts
Recent Posts
