Week in Review: January 7, 2022

Markets ended the week lower as higher interest rates and fears that the Federal Reserve might become increasingly aggressive in fighting inflation took their toll on both equity and fixed income markets. Growth stocks were hit particularly hard, with the tech-heavy NASDAQ falling 4.5%. As interest rates rise, the present value of a company’s future earnings are worth less. This can be particularly impactful for high growth companies that produce little in the way of earnings today, but hold out the promise of greater earnings in the future.

The release of the Federal Open Market Committee (FOMC) meeting minutes revealed a lengthy discussion about policy normalization including reducing the size of the bank’s balance sheet. This helped drive interest rates across the yield curve higher. At the short-end, the 2-Year Treasury yield rose 0.14%, to 0.87%, its highest level since March 2020. In the middle of the curve, the 10-Year Treasury yield ended the week up 0.24% at 1.77%, its highest level since March 2021. At the long end of the curve, the 30-year Treasury yield rose 0.21% to end the week at 2.11%.

Similarly, mortgage rates moved higher over the course of the week with the average 30-year rate rising 0.17%, to 3.46%%, its highest level since May 2020.  Higher mortgage rates could be a double-edged sword for the the housing market. Rising borrowing costs can both reduce demand and force sellers to lower prices.  Such would negatively impact the growing “wealth effect” as new and existing home prices have risen 34% and 23%, respectively, since April 2020.