Yesterday saw the biggest tech selling rout in over a decade. Is this a portend of 2022, is this what we should expect looking forward? Hello, my name’s Paul Carroll. I’m the CEO and founder of Avion Wealth, an elite wealth management firm here in Texas. Happy new year. Yesterday, the fed released its minutes from its policy meeting, clearly indicating they’re going to be raising interest rates here probably sooner than later. Now, frankly, unless you’re in a COVID induced coma, this shouldn’t be news to you. It’s in the news. They’ve been talking about it. They’ve been criticizing the fed for a year. Of course, it was going to happen. It’s happening all over the world.
I’m enthusiastic though. 2022 is probably the end of the pandemic. What we’re seeing with this Omicron is greater infectiousness, but milder symptoms. We are evolving from pandemic to endemic. Now, unfortunately, it’s endemic to the entire planet, but the worst is clearly behind us. Of course, the challenge we face now, we being the world, is the policies in place today have to be unwound. Politics being what it is, it’s harder to unwind these policies than to put them in place.
The fed, of course, has to take away the punch bowl, or risk losing control of inflation. Interest rates will go up as they tap the brakes on the economy. The economy is clearly overheated in almost every sector. Interest rate hikes tend to slow the economy. If the yield curve goes inverted, meaning those short-term hikes actually bring short-term rates above long-term rates, then that’s almost always a precursor for recession. But the fed’s getting very good at this. The last time it was an inverted yield curve, they were able to avoid that.
It doesn’t guarantee success, but what happens in this kind of environment? Well, the growth rally, the growth stock rally is almost certainly over. In fact, in yesterday’s rout, tech stocks got beat to death and that’s because tech stocks benefit the most from low interest rates. Interest rates start climbing, the denominator of the valuation ratios starts making valuations a lot more challenging for the market. Tech giants clearly peaked last fall. Hedge funds are selling tech aggressively. Now, will this hurt home values, this new environment? That’s actually very hard to say.
This is not 2008. In 2008, there was quite the bubble driven by unqualified borrowers. Today, the average credit score of a mortgage holder is about 750. That is not weak. There’s a massive shortage of housing in the United States, by some measures as many as 5 million houses in all sorts of sectors of the economy. Of course, it’s very localized. It’s where people want to live. There’s also simultaneously a glut of housing in places like Toledo, Ohio, and other rust belt cities, where people are leaving to come to Austin and Atlanta and other growth areas.
Bonds are going to be under great stress. In a rising interest rate environment, there’s two things to do, stay short, stick with quality. We’ve been positioning our clients short and in quality for over a year now in anticipation of this. Markets seem convinced that inflation is not out of control. Now, markets have been wrong in the past, but generally, the wisdom of the crowd is the best bet out there. The market seem to feel that the fed and central banks the world over will keep this one under control. They will be fighting, countervailing forces and supply chains and things like that.
I think the bigger issue is from a monetarist point of view, monetarist induced inflation is not yet baked into the cake, nor are the expectations. This will be a critical year. How do you protect yourself? Tips. Another way to protect yourself from inflation is very low interest rate debt. If you got a 2.5% mortgage last year or better, or somewhere within that range, you’ve got a great inflation hedge because inflation’s going to be paying your mortgage off, if in fact it is out of control.
2022 is going to present us with challenges. Some of these challenges, though, are welcome challenges. With the pandemic in the world finally waning, we’re ready to look forward at the challenges that 2022 offer. Hit them head on and make 2022 a great year. So if you have any questions about this or any other topic, please call me. We wish you the best of success and a fantastic 2022
“How Long Can the Global Housing Boom Last?” The Economist, The Economist Newspaper, https://www.economist.com/finance-and-economics/how-long-can-the-global-housing-boom-last/21807002.
Bloomberg.com, Bloomberg, https://www.bloomberg.com/news/articles/2022-01-05/heaviest-tech-selling-in-a-decade-fueled-stock-market-rate-rout.