The Calendar Turns On A Dreadful Year For Financial Markets

Look beyond the headlines to discover the driving forces behind market trends and consider how they impact a credit union’s investment portfolio.

Top-Level Takeaways

  • After mistakenly characterizing inflation as “transitory” in 2021, the Fed spent most of 2022 playing an extreme game of catch-up.
  • Its policy tightening in 2022 included 425 basis points of rate hikes and more than $400 billion of balance sheet reduction.

The calendar has thankfully turned on what was a very challenging year for financial markets in general and the bond market in particular. After mistakenly characterizing inflation as “transitory” in 2021, the Fed spent most of 2022 playing an extreme game of catch-up regarding monetary policy tightening.

Included in the Fed’s efforts were 425 basis points of rate hikes and more than $400 billion of balance sheet reduction. Both contributed to historically high levels of interest rate volatility for a sustained period, which had a notable impact on liquidity and performance of broad fixed income.

However, in the final two months of 2022, tamer inflation reports and emerging recession signals fueled a market narrative that peak inflation had been reached. Despite the Fed maintaining hawkish guidance at the Dec. 14 FOMC meeting, short-term rate markets continue to price for rate cuts in the second half of 2023.

As we begin the New Year, there are multiple themes to consider. The four most important themes for 2023 involve rebounding bonds, rate volatility, recession risks, and liquidity in the banking system. Read more about these in ALM First’s January 2023 Market Commentary .

This market commentary is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Visit trustcu.com to read about the latest economic data and overall market trends. 

Jason Haley, Chief Investment Officer, ALM First

Jason Haley is ALM First’s chief investment officer, joining the firm in 2008. He heads ALM First’s Investment Management Group (IMG) and is portfolio manager for the Trust for Credit Unions mutual funds. Haley and his team are responsible for leading the investment process and investment theme development for the firm. Haley also oversees all capital markets activities, including portfolio management, trading, market research and commentary, and execution of hedging and funding strategies for the firm’s depository clients. He holds an MBA with a concentration in finance and a BBA with a concentration in marketing, both from The University of Mississippi.

January 23, 2023

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