October 7, 2022


Fine Art Of Business

Markets are stuck with a case of Fed indigestion: analyst

3 min read

With the Nasdaq Composite (^IXIC) teetering on the brink of correction territory, a painful sector rotation continues to flummox investors this year in expectation of the Federal Reserve taking its foot off the gas. Amid the overall market defensiveness, one analyst is suggesting that investor pessimism may be overblown.

Callie Cox, investment analyst at eToro, recently appeared on Yahoo Finance Live to break down the current macro environment, as markets recently went from pricing in zero rate hikes in 2022 to four rate hikes in a matter of months.

“Investors can feel the ground kind of shifting underneath their feet, and rate hikes do change the risk/reward equation a little bit,” she said. “We look at the market, though, and we see a market that’s really chewing through this. But whenever we see a market processing moves ahead of time, we think that that could open up the door for more relief rallies once the Fed gets to the point where they actually hike rates.”

Cox says the biggest driver of any relief rally in stocks is piles of investor cash combined with the concept of “there is no alternative,” or TINA.

“TINA is actually one of the big concepts we’re really stressing on this year — especially to our customers — because right now, the environment feels incredibly uncomfortable. And yes, we are processing a Fed that is likely going to make some policy changes this year. But at the same time, there’s a lot of cash on the sidelines and not a lot of places for it to go.”

Inflation is a top investor concern this year, as the most recent Consumer Price Index print hit a near-four decade high. And it’s precisely that high inflation that drives investors in search of yield when government securities are offering comparatively little. Cox points out that the yield on the U.S. 10-year Treasury Note adjusted for inflation is at the lowest point in at least 50 years.

Inflation outpacing government bond yields

“As you can see in the chart right here, if you look at the 10-year yield and adjust it for inflation, adjust it for CPI year-over-year growth, you’re losing about 5.5{6e6db3521f07ebedc52abc8c7bfbbc5a7fcd8802a2a8a5c8cfaa0d09c6ebceb7} on average. And obviously, that’s very unattractive, especially if you’re looking for more growth-focused measures.”

Tuesday, BofA released its monthly Global Fund Manager Survey of respondents managing over $1.2 trillion in assets, which revealed Wall Street is deploying some of its huge cash piles on commodities and stocks in the banking, industrial and materials sectors.

Cox reminds investors that rate hikes are a signal that the economy is growing and doing well, and that as long as the Fed removes accommodation gradually, there’s the possibility of a soft landing.

She also points out on a 50-year chart of the benchmark Fed Funds Rate that the S&P 500 rarely peaks when the Fed begins tightening.

Fed Funds Rate vs. S&P 500 Peaks

Fed Funds Rate vs. S&P 500 Peaks

“The first few rate hikes that the Fed embarks on, especially if they’re gradual, typically don’t upend the market,” Cox says. “In fact, the market hasn’t gone through a bear market during the first few rate hikes of a cycle since the 1970s.”

Not that there are not considerable investment risks as the Fed faces the task of removing an unprecedented amount of accommodation in the midst of an ongoing pandemic. Economists are quick to point out that the transmission window for Federal Reserve monetary policy can be up to 18 months.

Cox reminds investors of the need to think critically no matter what the market environment, and that the search for yield is not itself an investment strategy. “TINA is just one piece of a complicated market puzzle, not a foundation for an investment strategy. In the end, different investments serve important purposes in your portfolio,” she says.

Jared Blikre is an anchor and reporter focused on the markets on Yahoo Finance Live. Follow him @SPYJared.


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