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• Feb 10, 2022

Following a strong year for the financial markets, 2022 has kicked off with broad market weakness, but it's important to look at the factors behind this shift and what you can do to stay on track to achieving your financial goals.

High inflation and recent policy response have been key drivers behind market volatility, leading to large daily swings in both directions of investors buying and selling.

Sid Vaidya, Chief Investment Strategist for U.S. Wealth at TD, explains that strong consumer demand paired with COVID's impact on global supply chains has contributed to high inflation.

Watch the video below for more information.

To fight further price increases, the "central banks have pivoted in very short order from loose and accommodative monetary policy to a more hawkish stance."

The Federal Reserve (Fed) began reducing the scale of its monthly asset purchases last year and are expected to start increasing interest rates potentially as early as March.

The aggressive signals from the Fed, have led to increased market volatility.

"The volatility we are seeing in the markets is really a recalibration and repricing of risk and a change in investor sentiment," Sid said, adding that investors are reassessing current market prices in anticipation of higher interest rates and tighter monetary policy in the future.

Opportunities in the midst of market volatility

What investors should always keep in mind is the market moves in cycles.

Market pullbacks of 10-15% are not unusual to see in normal market cycles, especially following strong runs like we've seen in the past two years.

Sid notes that sell-offs in the markets have been broad and that this could present opportunity for investment in companies with proven revenues and earnings.

His message to investor's is, "if you have a long-time horizon, look at this volatility as an opportunity to invest in high quality companies with proven fundamentals at more reasonable valuations."

Furthermore, while heightened market volatility can be a source of anxiety for investors, looking at the long-term price returns of the markets can help to offer higher level perspective. What appears as a crisis one year is often a mere blip on a longer-term return chart.

What Rising Interest Rates Could Mean for Investors

Though the Fed's ability to influence supply is quite limited, it can help to manage future inflation by directly influencing demand and helping to moderate inflation expectations.

Sid said that the Fed is expected to begin raising rates as soon as March, followed by an additional three rate hikes over the course of this year.

"They will likely also increase rates in 2023 to a level in the 1.75 - 2.00% range for the shorter-term Fed funds rate," Sid added. "With these expectations, we continue to maintain a modest pro-risk stance with a slight overweight to equities and a slight underweight to fixed income."

Sid adds that it's important to focus on higher quality investments that will continue to generate positive revenue, earnings and cashflow growth even in challenging economic conditions. A good way for investors to get exposure to these types of higher quality companies is through active managers who assess each company based on its fundamentals.

He also expects there will be opportunity for dividend growth in 2022, as many companies have built up excess cash reserves. Diversification by asset class, geography, market capitalization and investment style are also important to reduce risk exposure.

Sid provided an important message to investors, "Be invested, but be selective with a higher-quality focus."

This article is for information only and does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell, or otherwise transact in any investment including any products or services or an invitation, offer or solicitation to engage in any investment activity.

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