The Federal Reserve’s most significant rate hike in 22 years translated into a manic-depressive two-day run on Wall Street.
–
I’m afraid. Just like everyone. I’ve been following the markets for over 40 years now and it doesn’t get any easier
Jim Paulsen
Chief Strategist Leuthold Group
–
–
–
The US central bank raised interest rates by 50 basis points on Wednesday evening to cut inflation. It was about the most drastic increase since the dotcom year 2000. This was followed by a manic-depressive trade, partly because the majority of Wall Street players have never really experienced a ‘strict’ central bank.
–
A rare veteran (and notoriously stock market optimist), Leuthold Group chief strategist Jim Paulsen, frankly admits to Bloomberg, “I’m scared. Just like everyone. I’ve been following the markets for over 40 years now and it doesn’t get any easier’
–
Initially, investors reacted enthusiastically. They’ve had themselves over the past few weeks braced for an even tougher Federal Reserve Chairman Jerome Powell.
–
He said that rate hikes of 75 basis points were not being considered. “Markets estimate the chance of a 75 basis point rate hike in June at 35% ahead of Wednesday night’s interest rate meeting,” said Mark Haefele, a UBS strategist. “Powell’s message was therefore milder than estimated, so positive for equities and for bonds.”
–
Too few?
24 hours later, investors fear that central banks are doing too little to quell persistent inflation. “It’s a risky gamble for Powell. The danger is that a 0.5 percentage point hike will prove insufficient to halt rampant inflation in the US and that the Fed will fall further behind. Then more aggressive – and more painful – steps will be needed later on,” said Wolfgang Bauer, fund manager at M&G Investments.
–
Frank Vranken, chief strategist at asset manager Edmond de Rothschild, added: “An underexposed aspect of the Fed meeting is that the central bank will shrink its balance sheet by $95 billion a month from September. Until recently, the Fed bought up $120 billion in debt every month. That is a huge trend break.’
–
Who will take over the Fed’s role as buyer of US Treasury bonds? Japan and China have become net sellers.
Frank Vranken
Strategist Edmond de Rothschild
–
–
–
Vranken notes that debt issuance went smoothly for the US government during the pandemic: the Fed bought most of it. Who will take over that role? Japan has recently been a net seller of US paper and China has already kicked the habit† The US 10-year yield rose again above 3 percent on Thursday. Technology stocks, in particular, are particularly sensitive to interest rates, as higher interest rates reduce the present value of distant future earnings.
–
Preference for value stocks
UBS is nevertheless convinced that the markets will end the year higher than they are now. “Stocks should do relatively well in an environment of high inflation and rising interest rates,” says Haefele. He does have a strong preference for value stocks (including oil stocks), which are cheap compared to current earnings. “After a long period of disappointing returns, it’s time for value stocks to catch up with growth stocks.”
–