Pondering the Punch Bowl

Weekly Market Update | January 24, 2022

Highlights

The prospect for tighter central bank monetary policy and rising geopolitical tensions continue to weigh on global equities. Last week, the NASDAQ dropped a sharp 7.6% and officially fell into correction territory. The S&P 500 also tumbled with the broad index closing the week 5.7% lower. International stocks held up a bit better with European and Japanese stocks down 2.0% and 2.5%, respectively. The 10-year U.S. Treasury yield closed the week 2 basis points lower at 1.76%.

The longest-serving Fed Chair in U.S. history once quipped that it was the Fed’s job to “take away the punch bowl just as the party gets going.” Those words seem to describe the current environment well with investors pondering just how much of the punch will be removed from the bowl.

The Federal Reserve may provide investors with some guidance following their January 25-26 meeting. As it stands currently, the market believes that a March rate hike is very likely and that the Fed will begin to reduce the size of its balance sheet shortly thereafter. While financial markets have struggled to digest this news, history suggests that markets may have further room to run following Fed liftoff. We suspect that clarity on Fed policy could help to stabilize the bond market, which in turn, could help to stabilize the equity market. Though it may take some time for the Fed to firm up its plans.