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Should Rising Rates "Taper" Your Expectations?

Should Rising Rates "Taper" Your Expectations?

December 22, 2021

You may be hearing market pundits discuss the Federal Reserve's 'taper' strategy if you've watched CNBC or read the News headlines buzzing your phone notifications lately. Tapering is simply when the US Federal Reserve systematically decreases the amount of assets it purchases each month.  This effects businesses and governments by making it more difficult to raise funds for future growth, in other words tightening the money supply (also something that you are probably seeing scroll across your phone notifications).  Tapering by the Fed is the first step to controlling prices of goods and services.  The second tool the Fed uses to control inflating prices is lifting interest rates. It may seem eons ago that you heard about rising rates, but actually we don't have to look back very far to catch a glimpse of how rising rates impacted the economy. Just back to the fall of 2015 through winter of 2018/19.

Here is a chart of the rising rates from that period using the Federal Reserve's Effective Rate (November 2015 - December 2018).  The top graph is the effective rate, and the bottom graph is the growth of a $10,000 investment in the S & P 500 total return index over that time. 

Notice that the annualized pace of a $10k investment in the S & P 500 over these 3.2 years was only 6%.  Compare that annualized pace to the same scenario but from December 2018 - December 2021 of 23.69% (see graph below).

Just last week at the Federal Reserve's meeting, newly re-elected chairman Jerome Powell and his colleagues indicated (12 out of 18 members voted for) 3 rate hikes in 2022.  Generally the Fed will raise rates 1/4 or 1/2 a point each lift taking the effective rate back to between .75% - 1.00% in 2022 with the majority of members believing the effective rate will be above 1.25% sometime in 2023.  

We aren't saying we are in a doomsday scenario, but we would urge you to taper your expectations for market growth if your expectations are to experience years like 2019-2021 again anytime soon.  Because of this backdrop our team is diligently accessing portfolios and making shifts on your behalf. Please give the Cetera 2022 Market Outlook a read to stay up to date on regions and industries we are watching!  While we may not be looking forward to the fast growth rates of 2019 - 2021 we still believe that some moderated growth is possible. 

Opinions expressed are that of the author and are not endorsed by the named broker dealer or its affiliates. All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index.