Why Invest in The Aqueduct Strategy Given Prospects of Decreasing Monetary Stimulus
The Federal Reserve recently announced the pace of tapering will double in 2022 to $30 billion a month. Further reductions could be coming next year as well. Interest rate projections were updated as well to show a median forecast of three hikes in 2022. Even though the Fed is decreasing monetary stimulus and forecasts three rate hikes during 2022, many experts feel it is likely that the stock market will continue to rally. Why?
The Fed and Interest Rates
Investors will continue to gain confidence in the Fed's willingness and ability to fight inflation. They may not like the prospect of higher interest rates, but they realize that the Fed is decreasing the odds of persistent inflation and policy error with their approach.
Investors also realize that tapering bond purchases is different from eliminating them altogether. And with a current Fed funds rate target in the 0% - 0.25% range, this leaves plenty of liquidity in the economy, a positive for the markets.
Fed officials now think interest rates will reach 0.9% by the end of 2022; 1.6% by the end of 2023; and 2.1% by the end of 2024. All in all, these rates are still low by historical standards. The average interest rate in the United States from 1971 to 2021 was 5.47%.
Low rate environments have historically been good for stocks for a number of reasons, including the fact that bonds and fixed income investments don’t offer the opportunity for solid returns in this type of environment. Additionally, low interest rates can aid the bottom line of companies that borrow money for expansion projects.
Even in spite of the pandemic and supply chain issues, consumer spending continues at a torrid pace. While increased inflation may at some point put a damper on this spending, for now consumer spending is helping fuel the economy and if this continues it will have a positive impact on stocks. What the experts think Goldman Sachs expects a 9% increase in the S&P 500 in 2022. David Kostin, their Chief Equity Strategist sees solid increases in earnings for companies in the index, as well as increased sales. He believes that investors will want to increase their allocation to stocks in 2022.
JPMorgan predicts that 2022 will see the end of the COVID pandemic and will see a full global economic recovery. Their outlook indicates that we will see new vaccines and other therapeutics to combat COVID that will result in a “strong cyclical recovery, a return of global mobility, and a release of pent-up demand from consumers.” A number of other major banks and Wall Street firms are bullish going into 2022. The forecasts of 14 major firms look for stocks to rise, but these gains may be mitigated by already high stock valuations. They see strong consumer spending and capital expenditures as factors fueling these gains.
The Aqueduct Strategy
It is our belief that the effects of this historically elevated stimulus will be felt well into the next few years. Historically markets continue to rise even as stimulus is gradually withdrawn from the economy. Advisors can take advantage of this environment by putting their investor clients into the Aqueduct Strategy which uses bullish leveraged ETFs in low interest rate environments to maximize stock market gains.
Aqueduct’s strategy is an all-equity strategy that focuses on the level of fiscal and monetary strategy being employed in the economy at any point in time.
Fund manager Ariel Acuña watches the markets closely and takes an opportunistic approach to managing the fund, as he did in the first quarter of 2020 as the market experienced a steep decline in the wake of the onset of the pandemic. He moved the fund into leveraged ETFs that served to amplify the fund’s gains as the markets recovered through the remainder of 2020 and ended the year on a strong note.
Acuña monitors the economy and stimulus programs with a specific eye on the Fed’s policies. Our returns have been exceptional since the fund’s inception. The Aqueduct Strategy is available to RIAs and advisors as part of the Fidelity Separate Account Network. Of the 1,600 strategies in the network, we are one of only two separate account strategies to have ranked in the top 10 every single year over the past decade.
Not surprisingly, in the same time period the Aqueduct Strategy has outperformed the S&P 500 index by around 1,000 basis points, on an average annual return basis. Advisors can access The Aqueduct Investment Strategy (TAS) through the Fidelity Separate Accounts Network.
Take a look online or give us a call to learn more.