1/12/2022 11:00:00 PM

CIO Report: Markets kick off the new year with a shaky start

In December, the pivotal event was the Federal Open Market Committee (FOMC) meeting. The Fed announced it would accelerate the tapering of asset purchases and provide three interest rate hikes over the next year. Given the global economy's strength and elevated inflation, this tightening cycle is expected. The markets rallied on this outcome as uncertainty was taken away. However, the Nasdaq technology index lagged as technology and growth names sold off. Surprisingly the 10-year Treasury rate didn’t move until the new year.
Looking back in 2021 was a year where what worked in 2020 essentially didn’t in 2021. Internet, e-commerce, software, payments etc. were fragile and more industrial and cyclical names outperformed as the economy strengthened. We had too much exposure to the former and not enough to the latter in hindsight.
The pandemic follows a predictable outcome with new strains more transmissible but less potent; what is unpredictable is the government’s response to them. I am optimistic that we will head back into a period of normalcy by the middle of the year, which should benefit travel stocks and those companies providing services that lockdowns have impacted.
Heading into CY22, we have seen a shaky start to markets so far, with a 10-year treasury rate increase above the peaks achieved in 2021, reaching 1.8%. The reduced liquidity scenario from the tapering of asset purchases and higher interest rates has caused pressure on high growth valuations. It is difficult to predict interest rates movements given the multitude of inputs that determine interest rates. Even if we could correctly, it would be more luck than skill and not repeatable. 
We prefer to get our edge in finding those competitively advantaged businesses and holding them so long as their moats are widening or at least stable, which reduces the frequency of decision making. This involves staying the course and knowing there will be a short-term valuation draw-down if interest rates increase, but share prices will follow earnings in the long term.
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