Chris Blumas' Top Picks: February 16, 2022
BNN Bloomberg
Top picks from Chris Blumas, portfolio manager, Raymond James Investment Counsel
MARKET OUTLOOK:
Inflation and the monetary policy plans of the U.S. Federal Reserve continue to dominate the headlines. Inflation is rising around the world at a rate that hasn’t been seen for many decades and could stick around longer than initially expected.
The Federal Reserve’s policy response to the COVID-19 pandemic was extremely aggressive and likely helped to prevent a depression. Going forward, the central bank is planning an abrupt transition from easing to tightening and this monetary policy “U-turn” has come as a major shock to the equity markets.
In the end, it looks like the Federal Reserve over-estimated the amount of stimulus required to get through the pandemic and is sharply reversing course by announcing plans to shrink its balance sheet and increase interest rates.
On the positive side, the U.S. economy and employment picture are very strong. In addition, there are US$1.6 trillion in reverse repurchase agreements on the Federal Reserve’s balance sheet. The interest earned on these assets is five basis points per year and this program prevented money market rates from falling below 0 per cent. These assets are a significant percentage of the central bank’s total assets (~18 per cent) and could provide equity markets with a cushion as liquidity is quickly pulled from other parts of the financial markets.
With exceptionally low nominal interest rates and negative real returns, investors holding cash and low-yielding fixed income securities risk a loss in purchasing power over time.
