Fed before a radical move
This means that the rise in interest rates for investors
By Benjamin Feingold
May 4, 2022 at 4:43 p.m.
The last time the US Federal Reserve raised interest rates by half a percentage point, Bill Clinton was president. Due to high inflation, the central bank feels compelled to take such a big step again. This has consequences for investors.
The evening is the hour. The US Federal Reserve is expected to raise interest rates by a whopping 0.5%. The central bankers communicated this step in advance, so it is not a surprise. But for investors, it is still a turning point.
In the short term, many of the Fed’s interest rate hikes appear to have been priced in by the markets, but have adjusted within a 0.75-1.0% range. If this rise, which is considered almost certain, does indeed occur within the expected range, there could even be a relief rally in capital markets.
This has often been the case in recent years. Short-term favorites therefore include the winners of recent years: tech stocks, economically sensitive stocks or bonds that may rally after the recent price correction.
But one thing is different from previous years, when investors could rely on the Fed and other central banks to keep inflation in check. But central banks have completely underestimated current inflation – the corona crisis, disrupted supply chains, rapidly rising energy prices and the Russian invasion of Ukraine are all contributing to persistent inflation and high.
Inflation was low for years before the Corona crisis – for a long time it was well below the 2% mark at which central banks consider price stability to have been achieved. In the United States and the euro zone, it has soared and now exceeds 7%. This is a level not seen for decades. “Wherever I talk to companies, I hear about delivery bottlenecks and planned price increases. Second-round effects on wages are only a matter of time,” says Hendrik Leber of the Acatis fund company.
turning point in monetary policy
Gil Shapira, chief strategist at brokerage eToro, expects the Fed to adopt tight monetary policy for the foreseeable future in order to rein in inflation: “Rapidly rising inflation will initially shift monetary policy to United States in the long term. further interest rate hikes this year, there will be no quick support in the form of bond purchases just yet.” Regarding the U.S. Federal Reserve’s decision, Shapira expects also that there is an announcement that the bond purchases of the last few years will be reduced.
Even if the Fed’s expectations are not disappointed, a lack of bond purchases means there is potential for long-term disappointment. “Since the financial crisis, they have been driving the stock and bond boom,” says Jürgen Molnar, capital market strategist at broker RoboMarkets. “Because central banks lack the leeway to take supportive action, investors must adapt to a new market landscape,” Molnar says.
But the Fed is not alone. The cautious European Central Bank is also signaling that it will end its zero interest rate policy in the summer.
This means that the tightening of monetary policy threatens an economic slowdown. In the medium term, for example, economically sensitive stocks, such as consumer stocks, and stocks that benefit from exports are likely to suffer.
Additionally, tech companies with little equity are likely to have a tough time. They are mostly unprofitable and investors are betting that these companies will generate large profits in the future. “More than half of these stocks have already suffered a correction of 50% or more”, calculates the expert Molnar. But with rising interest rates, these future gains will be swallowed up by higher discounts, putting these tech stocks under pressure.
Bank stocks should actually benefit from rising interest rates, as their traditional lending business allows for higher interest margins. The problem: An economic slowdown is weighing on this business.
In contrast, value stocks have historically performed well in an environment of rising interest rates and high inflation. These are stocks of companies that typically have a substantial equity cushion, generate high recurring income, often pay high dividends and are attractively valued. However, unlike tech stocks, these stocks do not have the high growth potential, but that will be exactly why these stocks are exactly the right stocks for the turn.
Benjamin Feingold operates the stock portal Feingold Research.
This message is not a recommendation to buy or sell individual stocks, ETFs or other financial products No liability is assumed for the accuracy of the data.