In our most recent installment of our “Conversations with Smart People” education series, we sat down with two investment specialists to talk about the very unique investing environment that prevails in 2022. This year has certainly reminded us that you can never predict the future. The focus of the dialogue was the trends that investors can reasonably count on as we near the end of 2022 and prepare for 2023.
As we recently detailed in our quarterly market report, Risks and Opportunities, we expect that higher interest rates and higher inflation will continue for the foreseeable future. As the near-zero interest rate environment that we have lived in since the financial crisis fades away, we are experiencing a real paradigm shift for the investment landscape. That requires investors to adapt and adjust accordingly, with an eye to the future.
For a deeper dive on this changing environment, we teamed up with investment colleagues Tamzin Manning, US Equity Portfolio Specialist at T. Rowe Price Associates, and Dhruv Nagrath, Global Fixed Income Strategist at BlackRock. We covered everything from the future of the dollar to deglobalization. Dhruv painted a picture of the abrupt change in the Fed policy, as the Fed had its foot firmly on the gas pedal last year and slammed on the brakes in 2022. Tamzin explained why this environment is so much more favorable to companies that can grow their dividends and provide income to investors now. Our team was particularly struck by a few key takeaways from our discussion:
- Financial markets always have risks and opportunities. Admittedly, this environment feels overweighted with risk and light on opportunities. However, we are getting closer to the point that the Fed can stop raising rates so aggressively, which may allow financial markets more room to recover.
- Inflation is very likely to persist. The job market and American consumer continue to be strong, which is preventing us from falling into a recession at this point. However, it is still quite possible for us to have a recession in 2023.
- There are other opportunities during a time of volatility, such as tax loss harvesting and repositioning assets to prepare for the next phase of market growth.
- Investors have been taught for years to “buy and hold.” While it is true that investors should remain invested even during tumultuous times, the opportunity set going forward is likely to be different than what has been successful over the past 10+ years. Growth companies have been the big winner during that time, but a higher interest rate environment is more supportive of value companies, and those that can grow their dividends and have high current earnings.
- Central banks around the world are tightening monetary supply and increasing interest rates, which should help curb inflation, but may make the global economy more susceptible to recession. Due to the war in Ukraine, demographics, and other reasons, the US is likely the most resilient country in the face of a potential 2023 recession.
The day after our discussion, Fed Chair Jerome Powell unexpectedly announced that the Fed may be able to slow its pace of increases. The market reaction was swift and positive, with some indices gaining over 4% in a single day. While it is difficult to experience downturns and volatility as an investor, this is the reason to stay invested – days like that cannot be predicted.
Our educational events and articles are designed to help you understand the current economic backdrop, navigate the potential of the financial markets and certain asset classes, and stay committed to your long-term investment goals. If you would benefit from a portfolio review or would like to understand the benefits of strategies like tax loss harvesting, email us at email@example.com.
Debra Brennan Tagg is a CERTIFIED FINANCIAL PLANNER™ Professional and the creator of the DBT360 Financial Plan, a proprietary program that helps her clients prioritize their goals, leverage their resources, and address their risks. She is the president of BFS Advisory Group and teaches the public and the financial services industry about the importance of values-based financial planning and investor education.