Fixed Income Fizzles in the New Year

Fizzling out fireworks

2022 is off to a rough start for the fixed income markets. The first week of the new year was one of the worst weeks for bond performance in recent memory. The 7-10 year bond funds were down -2%, while longer term bond funds were down -4%. All of this in the span of just five days. The release of the latest Federal Reserve’s policy meeting notes turned the bond market into believers that Fed Chairman Jerome Powell meant what he said in December. Now, the bond market believes that the Fed will make good on all of its predictions of rate hikes and balance sheet reduction in 2022, and that these actions will ultimately slow the growth rate of the economy significantly. But we have seen this Fed be nimble, and if inflation begins to wane in any appreciable measure, the Fed will most likely curtail its current hawkishness (or tight monetary policy) with as much haste as it showed in its pivot from dove to hawk in 2021.

There is a question that will be answered in 2022. What happens when government outlays decrease by roughly $1.3 trillion dollars in one year?  This number does not include the recently passed infrastructure bill. Such an unwinding has the distinct possibility of shifting the aggregate demand curve to the left. Will the private sector pick up the spending torch? This is one of the reasons that we are less sure about the path of rate hikes that are being priced into the market right now. The futures market is currently pricing in three short-term interest rate hikes for 2022.

The purpose of rate hikes is to make it harder to borrow money in order to shift the aggregate demand curve to the left to potentially slow down an overheated economy. If there is already less demand due to a decrease in deficit spending by the government, will the predicted rate hikes need to occur? The Fed wants the economy to stay in a sweet spot of growth. It attempts to make the upswings less violent by throttling them with rate hikes so that, the theory goes, the inevitable downswings will be less violent as well. 

For all of the complaining that we have heard about the Fed, they have gotten much better at their job. The U.S. economy has matured from having frequent recessions in the early- to mid-1900s to much less frequent recessions over the last 40 years. However, we have not had to manage in recent memory quite the government outlay differences that are coming down the pike this year.

The bond markets are in a bit of turmoil waiting for an answer to the question of what the Fed will ultimately do in 2022. We will be watching where it all goes from here.

Model Update

On Monday, January 3rd, EWM Investment Solutions Opportunity models underwent their monthly relative strength rotations. The Global model eliminated its exposure to long-term government bonds and added a position in low-volatility domestic stocks.

There were no trades in the remaining EWM Investment Solutions models during the week ending on January 8th, 2022.  The major equity market sectors remain in a long-term favorable trend, and the Asset Allocation models are near their maximum allowable equity exposure with domestic stocks favored over international shares. 

Performance is no guarantee of future results.   Trend signals are proprietary research of EWM Investment Solutions, a wholly owned subsidiary of Executive Wealth Management, LLC. Data source for returns is FactSet Research Systems Inc. This chart is not intended to provide investment advice and should not be considered as a recommendation.  One cannot invest directly in an index. Executive Wealth Management does not guarantee the accuracy of this data.

Quote of the Week

The stock market is supposed to be forward-looking. This past week it was rocked by the minutes of a meeting that ended more than three weeks ago.

The introduction to Ben Levisohn’s most recent article in Barron’s about the market’s reaction to the release of the minutes of the Federal Reserve’s December policy meeting.

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Returns are calculated as indicated below with reinvested dividends not considered except for the Barclays U.S. Aggregate Bond Index. Data source for returns is FactSet Research Systems Inc. The London Gold PM Fix Price is used to calculate returns for gold.

1 Week = closing price on December 31, 2021 to closing price on January 7, 2022

 1 Month = closing price on December 7, 2021 to closing price on January 7, 2022

 3 Month = closing price on October 7, 2021 to closing price on January 7, 2022

 YTD = closing price on December 31, 2021 to closing price on January 7, 2022

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