We continue the conversation on inflation and Fed rate increases with a few comments on looking for value and the perspective on the market in the emerging environment.
Dr. Scott Gorttlieb, Pfizer board member and ex-FDA chief, recently said “I think that we’re close to the end of the pandemic phase of this virus, and we’re going to enter a more endemic phase and as things improve, cases may pick up,” while inflation is at a 40 year high increasing 7% we truly are in a "new normal" to use an over used phrase.
The effects of Fed policy changes revealing the probablility of as many as four rate hikes this year, and the effects of inflation alone have created volitile and less growth oriented equity markets. However, we still beleive that a 10% growth rate is most likley, and the keen view of themes and value style utilization will prove strategic.
While these two factors, Fed policy and inflation, may create downward forces on equity growth rates, the emergance of COVID to endemic staus from pandemic status will be well played out in a way that will begin to positively effect market and macro economic conditions. This push-pull will "normalize" growth rates to more historic values, with of course volitility.
This means perhaps a 10% equity projected annual growth rate, interest rates getting to more palatable levels for fixed income assets, and an overall Fed long-term rate of about 3%.
Historical PE ratios are 13 to 15, and we have been in a market of 30 PE, hitting a recent high in January 2021 of 35.96. It seems that with the forces of a pandemic, including a supply chain calamity and a cheap money Fed policy hasled us to this 40 year inflation number that we know is not a positive for market values and performance. However, we may be in the midst of an acceterated market correction (perhaps another 5%) that in the mid to long term may be healthy for overall markets.
Charter Capital Advisors Research - Blog 1/20/22