In 2013, the Fed said it would slow down the pace of Treasury bond purchases. Investors reacted to the move with a "taper tantrum". There was a sell off in fixed income bonds, yields increased, there was a correction in stocks and a move to inflation hedge with a hike in gold and commodity prices. In 2021, traders would add Bitcoin and other crypto to broaden the hedge. Gold miner ETFs would also find favour.
Certain stocks were beneficiaries in the move in 2013 including Micron, Amazon, General Motors and Nike. The threat of rising rates would normally be a signal growth is returning to the economy. Bank stocks would be beneficiaries of rising rates. The Gods of Wall Street have already made strong gains. Goldman Sachs, JP Morgan, Morgan Stanley are pushing new highs. More can be expected from Barclays, HSBC, Lloyds, Natwest and Virgin after some profit taking.
Our Empires of the Cloud will always find favor, despite the threat of regulatory intervention. Apple, Microsoft, Amazon, Google, and FB remain the dominant stocks in Cloud and AI. Our "Chips with everything" fund features Micron, Nvidia, AMD, AMSL, Intel, NXP, Samsung, Qualcomm, TSMC and Texas Instruments. You will have to wait for bargain day, it's time to average out. Consumer stocks and luxury goods would benefit but most investors have already made the move,.
This week, Federal Reserve officials signaled they expect to raise interest rates by late 2023, sooner than they anticipated in March. The economy is recovering from the effects of the pandemic. Inflation is heating up. CPI inflation hit the 5% mark in May.
The Fed increased their forecasts for growth to 7% in 2021 and 3.3% in 2022. The reversion to trend at 1.8% is expected from 2024 onward. PCE inflation is expected to hit 3.5% this year slowing to 2.1% next. For the Fed, inflation is always and everywhere a transitory phenomenon. Unemployment is expected to slow to 4.5% this year and 3.8% next.
As for interest rates, the median projection is for rates to rise to 0.6% by the end of 2023 rising to 2.5% over the longer run.
Fed officials also discussed an eventual reduction, or tapering, of the central bank’s bond-buying program, Chairman Jerome Powell said in a press conference Wednesday. The timing of such a move remains uncertain. Central bank largesse may have to continue in the US and the UK, until the burden of borrowing falls within the capacity of the private sector.
Stocks and bonds fell after a statement from the Fed and Mr. Powell’s press conference. The Fed’s change in tone and new forecasts were “a wake-up call to the market” about the central bank’s likely response to higher inflation, said Phil Orlando, chief equity-market strategist at investment manager Federated Hermes Inc.
By the end of the week, the markets had pressed the snooze button. Inflation is always and everywhere a transitory phenomenon.
Contributions and References
WSJ Fed Pencils in earlier interest rate increase, most officials expect to raise rates by the end of 2023
|The Saturday Economist|
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