Brenda Vingiello, Sand Hill’s Chief Investment Officer, joined Squawk Box to discuss her thoughts on the latest market trends and market outlook for 2025. This
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.
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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.
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