Market Commentary: Rising Interest Rates Create Volatility and Opportunity

The first nine months of 2022 have been extremely painful for all investors. The Federal Reserve has embarked on a path to reduce high-flying inflation, and their main approach is to heighten the overall level of interest rates. Such a move has sent large ripple effects across the investing universe that include the following:

1. Risky investments have been routed. The “hottest” investments over the past few years – cryptocurrencies, meme stocks, SPACs, etc. – have lost significant value. These investments were built on a hope that was analogous to gambling. Market speculators have had their day of reckoning.
2. High-quality businesses have repriced. Rising interest rate levels affect the price an investor is willing to pay for a blue-chip company. This does not mean that a strong business will go bankrupt, stop paying a dividend, or reduce research & development. In fact, history dictates that high-quality businesses become stronger during difficult times; they can afford to make investments that weaker competitors cannot. We believe best-in-breed businesses will continue to have growing cash flows and increasing dividends in the future. Our investing philosophy – a rising income stream creates wealth over the long-term – remains in place. A volatile market should allow for opportunistic investment in high-quality companies.
3. Bonds have once again become a viable investment class. For the past 15 years, our team has avoided longer-term bond purchases. The reason was simple: interest rates were so low that an investor could receive a better income stream by a stock dividend with the added benefit of long-term price appreciation. The decision has been appropriate considering the 15-year return of the bond index has been below 2.5% annually.¹  However, the recent rise in interest rates has created a return to the “old normal.” We believe some investors are able to opportunistically purchase bonds once again.

We expect the market will continue to be very volatile for the remainder of the year. That does not mean investors should cower in the corner. Instead, investors should look for long-term opportunities and remember this famous quote from Warren Buffett: “The true investor welcomes volatility…a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses.”