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Inflation in the United States reached 7% at the end of 2021, the highest since 1982. We asked Matthew Dattilio, Chief Investment Officer, for his insights.
What is happening with inflation and interest rates heading into 2022?
To balance the historically high inflation we’re seeing, this will be the first time in a long time that the Federal Reserve is hiking interest rates to balance the increasing costs of goods and services. We’re expecting to see three or four rate hikes this year. Borrowing funds will cost businesses more money and consumers will have to pay higher interest rates. In addition, inflation means that input prices for companies are increasing, which may slow down some growth.
What kinds of sectors will be affected by these changes?
Companies that are most affected by higher interest rates are growth companies (such as tech/biotech) that rely on borrowing a lot of capital to support their growth. Financial institutions, including banks, are likely to do better this year, since they benefit from an increase in interest rates.
How will this affect Mascoma Wealth Management clients? Should they be nervous?
The change will make a difference in what you’re investing in. We expect a lot of volatility this year, and realistically, growing money is never a straight line. Our advice is to not look at the market on a daily basis and continue to focus on your long-term strategy. You can trust us at Mascoma Wealth Management as experts and we’ll do our job to position your portfolio accordingly.
Every investment scenario will be unique, but can you give some examples of the kinds of adjustments that may help product better returns?
On the equity side, it would be smart to focus on quality companies with steady cash flows, solid fundamentals, and low leverage, meaning they don’t rely as much on borrowing capital. On the fixed income side, since bonds have an inverse relationship with interest rates (as rates rise, bond prices fall), bonds with a shorter duration are less sensitive to interest rate changes and inflation-protected bonds adjust as inflation increases.