Displaying items by tag: fed

(Washington)

The market took a big hit yesterday following the Fed’s expected rate hike. However, it was not the rate hike itself that caused the problems, rather it was the Fed’s statement and its dot plot. The Fed removed the word “accommodative” (regarding its policy) from its statement, which combined with its more hawkish dot plot, got investors worried. The Fed funds rate is now higher than inflation for the first time in several years. Stock markets fell on the news, with the Dow dropping 0.4%.

FINSUM: The Fed getting more hawkish should make investors worried, as the more restrictive Fed policy becomes, the sooner (and more likely) a recession will arrive.

(New York)

Treasury yields stayed pinned for most of this year. For many months it seemed like they were stuck in the ~2.85% range. This raised some hopes that we might have reached the crest in this hiking and rate rise cycle. However, Treasury yields have jumped considerably higher lately, and are now sitting close to their seven-year high of 3.11% from May. Yields have been moving higher as the trouble in emerging markets and Italy has waned, making investors turn to more pro-risk investments.

FINSUM: Yields are going to move in line with macroeconomic movements, especially right now. If the trade war worsens, or starts to show signs of hurting EM economies, expect a big retreat in yields.

(New York)

Rates and yields are rising as the Fed hikes and the outlook for the US economy improves. However, that will have a major effect on many stocks, which makes investors nervous. Accordingly, here are five stocks that should thrive in this rising rate period. JP Morgan believes investors should shift out of defensives and into cyclical stocks, like capital goods, financials, auto, and semiconductors. Five stocks to look at are: Applied Materials, BorgWarner, Caterpillar, KeyCorp, Parker-Hannifin.

FINSUM: This is a direct bet that we are not headed toward a bear market and recession. Given the market’s momentum lately, that could be a good change of tact.

(New York)

The whole market is generally afraid of rising rates. Both in 2015 and 2018, there were significant mini-meltdowns about the prospect of aggressive rate rises. One of the aspects that most worries investors is that higher rates will drive participants out of stocks and into higher-yielding bonds. However, while true in some respects, that narrative is far too simple. Higher rates are a symptom of a healthy and growing economy, which means the business fundamentals driving stocks are getting better, a factor which is likely far more important than incremental changes in rates.

FINSUM: We think there is some wisdom in these words, especially as they perfectly encapsulate what has happened with the market this year.

(New York)

The market has been doing very well lately. Political worries, trade wars, it doesn’t matter, nothing seems to be able to contain the market’s optimism. Despite all this, though, Bank of America says it is all about to come to an end. The bank’s top strategist says that weakening growth, rising rates, and a glut of debt will conspire to weaken stocks. “The Fed is now in the midst of a tightening cycle, ignoring structural deflation, focusing on cyclical inflation … Until this Fed hiking cycle ends we suspect absolute returns from financial assets will remain slim & volatile”. BAML says that weakening bank stocks even in the face of rising rates (which should be good for them) may be a sign of how badly the Fed’s tightening will affect of the overall economy.

FINSUM: This is quite a gloomy and contrarian opinion. We see the argument, but it certainly seems to contradict everything one can observe in the market and economy right now.