We are closely monitoring the current market volatility, much of which occurred after the recording of our market update. Here are some of our most up to date thoughts on recent events:
- Concerns over inflation and changing Federal Reserve policy have been the main driver of market volatility. Higher interest rates have a greater impact on companies with high valuations and/or leverage, which has caused growth stocks and small caps to see the largest pullbacks.
- Escalating tensions in Ukraine have also contributed to recent market volatility. We will continue to monitor this situation as its resolution is unpredictable. While our direct investment exposure to Ukraine and Russia is limited, spillover effects in Europe could impact globally allocated portfolios. We are currently underweight international equities, which will provide some insulation from volatility and potentially an opportunity if a dislocation occurs.
- We believe the current volatility represents a temporary reset in the markets, as investors adjust to a less stimulative environment, however our longer-term positive outlook remains intact. We still expect slowing yet strong economic growth this year.
- It is important to remember that Federal Reserve policy will still be relatively accommodative even after increasing rates. The effective federal funds rate in mid-2019 topped out around 2.4%, much higher than expectations for this year and next.
- Thus far this year asset allocation has added value, with value stocks, international developed and emerging markets all outperforming domestic equities.
We hope you find this video educational and informative. If you have any questions, please reach out to your advisor. As always, thank you for putting your trust in the Merit team.