Market Update – 12/17/2021

The Federal Reserve announced on Wednesday that it will double the pace of the tapering to $20 billion in Treasuries and $10 billion in mortgage-backed securities (MBS) in response to higher inflation, which is in line with market expectations. The Fed’s new dot plot projects that interest rate will increase in 2022 and 2023 three times.

The Fed’s announcement eliminated uncertainties, which has greatly encouraged the market. Based on our experience, the Fed tends to overestimate the rate of interest rate hikes and economic growth.

Investors have asked if there will be economic turmoil next year and are worried about whether the stock market will fall sharply after the rise of inflation. Investors should focus on the following points:

1. The stock market reflects future economic conditions. When market valuations and expectations become too high, any negative news is likely to trigger a decline and drive the economy to slow down.
2. Consumers have expressed reduced willingness to make large expenditures such as the purchase of new cars and real estate. The previous consumption boom was partly aided by the good performance of the financial market. Likewise, when the stock market falls, this will also lead to a decrease in consumption.
3. Europe is affected by epidemic and energy restrictions. China has adopted strict control over the epidemic, restricting domestic demand and export production. Although real estate developers in China received some assistance, the collapse of certain developers will still have a negative impact on the market
4. The market may react irrationally due to the epidemic at any time. When constructing an asset portfolio, one should consider that the future market may become increasingly volatile due to high valuations and the changing conditions of the epidemic, and consider whether increasing defensive assets is necessary.