The Federal Reserve isn’t trying to knock the stock market down as it quickly raises interest rates in an attempt to slow inflation that is still hot – but investors need to be prepared for pain and volatility more because policymakers won’t be left out, said investors and strategists.
“I don’t think they’re necessarily trying to bring down inflation by destroying stock prices or bond prices, but it’s working.” Tim Courtney, chief investment officer at Exencial Wealth Advisors, said in an interview.
US stocks have fallen sharply over the past week after hopes of a marked cooling off in inflation were dashed by reading August inflation hotter than expected. The data underpins expectations among capital-backed futures traders for a rate hike of at least 75 basis points when the Fed concludes its policy meeting on September 21, with several traders and Analysts are looking for a gain of 100 basis points, or a full percentage. the point.
Dow Jones Industrial Average
recorded a 4.1% weekly loss, while the S&P 500
down 4.8% and Nasdaq Composite
decreased by 5.5%. The S&P 500 index ending Friday below 3,900 is seen as an area of key technical support, with some chart watchers eyeing the possibility of a test of the 2022 low in the capitalization benchmark. large at 3,666.77 set on June 16.
A profit warning from global shipping and economy giant FedEx Corp.
Further fueling recession fears, contributing to Friday’s stock market losses.
Treasuries also fell, with yields on 2-year Treasuries
spiked to a near 15-year high above 3.85% on expectations the Fed will continue to push rates higher in the coming months. Yields increase when prices fall.
Investors are operating in an environment where the central bank’s need to rein in stubborn inflation is said to be get rid of the figurative concept of “the Fed puts” on the stock market.
The concept the Fed has introduced at least since the October 1987 stock market crash prompted the central bank led by Alan Greenspan to lower interest rates. An actual put is a financial derivative that gives the holder the right but not the obligation to sell the underlying asset at a set amount, known as the strike price, which acts as an insurance policy. against market decline.
Some economists and analysts have even suggested the Fed should welcome or even target market losses, which could be aimed at tightening financial conditions as investors scale back spending. pepper.
William Dudley, former president of the New York Fed, argued earlier this year that the central bank will not handle inflation those are running near 40-year highs unless they put investors at risk. “It is difficult to know how much the Federal Reserve will need to do to control inflation,” Dudley wrote in a Bloomberg column in April. “But one thing is for sure: to be effective, it will have to do more damage to stock and bond investors than it has so far.”
Some market participants are not convinced. Aoifinn Devitt, Chief Investment Officer at Moneta, said the Fed may view stock market volatility as a by-product of monetary policy tightening rather than an objective.
“They recognize that stocks can be collateral damage in a tightening cycle, but that doesn’t mean stocks ‘have to crash,'” says Devitt.
However, the Fed is ready to accept the market decline and the economy slowing down and even into a recession as it focuses on curbing inflation, she said.
The Federal Reserve kept the target interest rate on backed funds between 0% and 0.25% from 2008 to 2015, as it responded to the financial crisis and its aftermath. The Fed also cut interest rates to near zero again in March 2020 in response to the COVID-19 pandemic. With interest rates bottoming, the Dow
skyrocketed more than 40%, while the large-cap S&P 500
increased more than 60% between March 2020 and December 2021, according to Dow Jones Market Data.
Investors are used to “the wind that blows over a decade with falling interest rates,” said Courtney at Exencial Wealth Advisors.
“I think (now) the message from the Fed is ‘you’re not going to get this whirlwind anymore,’” Courtney told MarketWatch on Thursday. “I think markets can grow, but they will have to grow on their own because the market is like a greenhouse where the temperature has to be kept at a certain level day and night, and I think that’s the message. that markets can and should develop on their own without the greenhouse effect. “
Meanwhile, the Fed’s positive stance means investors should brace for what could be “a few more daily stabs” that could eventually prove to be one “last major blowout.” “, Liz Young, head of investment strategy at SoFi, said on Thursday. Note.
“This may sound weird, but if it happens quickly, meaning within the next few months, that really becomes the case for the upside in my view,” she said. “It could be a quick and painful drop, leading to a fresh move higher at the end of the year, which is more durable, as inflation falls more dramatically.”