US Stocks Lower as the Fed Confirms Rate Rises

The US Federal Reserve has confirmed what we all expected. Its latest minutes said that 50-basis point rate hikes should be the norm and that was the plan for the first hike.

This is entirely appropriate given how disastrously behind the inflation curve the Fed is. No one complained about Fed tardiness though, because everyone was enjoying free money? We are now seeing the price to pay for that approach.

The Fed’s Meeting Minutes showed the war in Ukraine was cause for pause on the previously likely 50-basis point hike. The war was not enough to prevent rate hikes, however, as inflation is already at diabolical levels and will be getting worse.

How high can inflation go?

Think 10% inflation. Perhaps 12%. Even at a rate of 50-basis points moves the progress back to an even neutral level, let alone actual tightening is far too slow. Fed hikes will not actually stop inflation for quite some time.

Having given due regard to the Ukraine war, expect the Fed to now hike by 50-basis points and take real action on unwinding the balance sheet at the next FOMC.

It will not happen today or this month, but there is a growing sense of foreboding regarding equity markets.

After the free cash run of the past two years, valuations hit unsustainable levels. We have had corrections before, but stocks are so far only gradually pricing in what is the predominant risk for the United States: An aggressive rate hike cycle as it enters recession?

The prospect of rampant inflation that demands significant and aggressive hikes, while at the same time the global economy and the US enter a slowdown created as a hangover result of the massive stimulus of recent years, and added to an ongoing supply chain disruption and now the conflict in Ukraine, do not a favourable investment environment make.

Fresh record highs were seen in New York in the first week of the year’s trading. Ever since then, it has been quite the rollercoaster, but with a persistent heavy bias.

Slowing European economy

There was talk of war, but few really expected it to happen. Now that it is here, the ramifications for Europe and the global economy are far worse than anyone could have predicted.

Energy prices look set to stay stubbornly high for the foreseeable future, and food availability and pricing have become a major issue.

For the European economy, it really is about the blow-back effects of sanctions and in particular the impact on consumer and business sentiment. ‘Caution’ will be the dominant response through the rest of this year.

The European slowing will also flow through to the US economy and dampen equity market sentiment. If the US were to slip into some form of recession as well, alongside a permanently slowed China, one would be left asking, just why are stock prices so high?

The US stock market can fall a further 20% should the talk of recession start to look rather likely. The “great wash” of money is about to be unwound and the persistent bullish sentiment merely for the sake of it, could well leave equities as the Emperor with no clothes for 2022.

Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities

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