It is now just over a year since the Federal Reserve began its aggressive monetary policy stance in reaction to the highest inflation levels since the days of bell bottom jeans. The collateral damage as the Fed Funds rate has risen at a quick clip has been dramatic and impacts appear to be spreading.
I have to admit when I first started investing in my mid-teens I never quite understood the obsession around the central bank demonstrated by Louis Rukeyser and his guests during Wall Street Week on PBS. And yes, I know I am dating myself here.
Nearly 40 years later, I now understand the near paranoid way the market parses every Fed statement for any clues or nuances to divine future policy actions. Casualties from the central bank's most rapid hiking of interest rates since the early days of Paul Volcker has been particularly bloody here in the month of March. The second and third largest bank failures by deposit size in U.S. history. Credit Suisse (CS) is in the arms of arch-rival UBS Group (UBS) and mounting worries late last week around Deutsche Bank (DB) .
Zero interest rates sparked a huge boom in IPOs and SPACs in 2020 and 2021. Almost all the stocks from that era have collapsed. It is a topic I touch on often as it resulted, in my opinion, the largest misallocation of capital since the Internet Boom even as this era of frenzy and speculation continues to get short shrift from most of the financial media. Ironically it is the deposits from many of these start ups that are now being guaranteed by the FDIC at Silicon Valley Bank even though technically they were 'uninsured'.
Rising rates have battered high beta parts of the market such as biotech, which is trading near a five-year low. The EV space also has largely been decimated as has Fintech. Even well-known and profitable growth names have not fared well in this storm. Amazon (AMZN) is off approximately 40% over the past year while Alphabet (GOOGL) has fallen by 25%, still relatively good returns in comparison to most of the small-cap growth space.
The stodgy old Utility sector has held up well compared to most sectors of the market but is still down in the mid-single digits including dividends over the past year. Some investors have rotated out of Utilities given they generally get better income streams from short term Treasuries.
Rising rates are taking their toll on the housing sector, a key economic growth engine. Consumer delinquency and write off rates are moving up at financial institutions like Capital One (COF) and are likely to continue to do so.
The list goes on. Unfortunately, the Federal Reserve let the 'real' inflation adjusted return on the 10-Year Treasury get up to a record and negative 6.4% before finally acting just over 12 months. The damage that policy mistake has wrought has been considerable. It is likely to grow even as investors hopes are growing that the Fed will soon have to 'pivot' given the damage to the banking system even as inflation is not nearly to the point of being under control.
Whatever comes next is anybody's guess, but one thing is sure, every comment from Federal Reserve will be dissected ad nauseum as monetary policy seems to be the only thing that matters in this market right now.
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