It might be an understatement to say that 2022 has started with a “bang” given the rush to raise interest rates, the latest Omicron shutdowns, and the geopolitical risks all causing wild swings in the equity markets. The writing was on the wall in the last half of 2021 in regards to interest rates and the effect that they can have on large borrowers, such as fast growing tech companies, as well as fixed income portfolios. The team began addressing those issues in late summer by shortening duration and exposure to long term interest rates, as well as becoming more defensive, particularly in the US. Last week we moved to further reduce US tech exposure and increased weighting in industrials, banks, and health care. These “tweaks” won’t erase all exposure to downward pressures but they certainly help to reign in volatility, which we see sticking with us until some of the issues resolve.

 

Our view has been that interest rates will rise off a floor of near zero but it is unlikely that they will go too far. Inflation is being driven largely by supply side issues rather than the more normal increase in demand for goods and services. While interest rate hikes may serve to send a message to the consumer, we believe that it will be a combination of COVID recovery in the supply chain and only moderately higher rates that send inflation back to acceptable and healthy levels. Expect to see more guidance on this issue in the coming week after both the BOC and the Feds move to act. Omicron appears to be cresting in much of North America, which we hope starts to unwind some of the supply side issues.

 

For those that are interested, this research piece discusses the market effect and outlook in more detail.

 

Best,

 

Livingston Wealth Management Group