Investors will face a dilemma this year due to the central bank’s austerity measures

The central bank, which acts as the US Federal Reserve, dramatically abandoned the use of the term intermediate to describe inflationary developments at its interest rate decision meeting in mid-December and accelerated the listing of the asset purchase plan ($ 30 billion less securities to buy from now on). Thus, the QE period ends in mid-March, prompting investors to push higher prices and earlier interest rate hikes.

Not only did inflation in the United States rise from 1.4 percent to 7 percent from January to December, but better-than-expected labor market data contributed to all of this. The unemployment rate was 3.9 percent in December, very close to pre-epidemic levels, while wages have risen at an unprecedented rate for decades. Frequent double-digit rise in house prices and rents, coupled with inflation figures alone, could be reversed.

Even with such good data, many have asked in the past why the economy should trigger $ 120 billion a month with negative real incomes. The only logical explanation for this is that the central bank wants to move firmly and, with some high caution, does not want to enter too soon to prevent an economic recovery after reopening.. The central bank has learned from the 2011 mistake of the European Central Bank, which pushed the central bank back into recession by raising interest rates as the first dim sign of inflation.

The U.S. stock market peaked by the end of the year after a temporary slump after the December meeting, and long-term bond yields rose only slightly, and the dollar could not appreciate further. Positive news in terms of foreign exchange.

In the first week of January, the minutes of the central bank interest rate decision meeting were released, which was disclosed Not only was QE’s listing discussed by decision makers, but there was also an enthusiastic discussion about how and when the central bank would reduce the balance sheet. Many believed that it would be worthwhile to start a moderately tight (QT) bond portfolio with the central bank in parallel with the start of interest rate hikes. In addition, there were those who decided it was worth raising the base rate faster or higher than previously thought.

This provoked a relatively strong reaction from investors, with stocks falling and bond yields rising. Due to the decline in inflation expectations, real yields also began to rise, with a significant cycle within each index: the high value growth sectors fell below the market, while the low value and revolving sectors ended up rising. Markets have begun to appreciate the first rate hike by March, and a total of 3-4 tariff hikes are expected this year.

It is worth highlighting three important things about the central bank’s “turnaround” and its market implications.

First it is worth approaching the problem from a macroeconomic perspective. Given that the US Federal Reserve sees the economy in good shape, it may dare to strike such a harsh tone. (Growth above average is expected next year, with unemployment rates approaching pre-epidemic levels) and will bear the mitigating effect of rising interest rates on demand. At current interest rates, monetary conditions are still very loose, and the cycle of rate hikes has not begun from such deep real interest rates and such large central bank balance sheets (37% of GDP). It continues to support the economy and risky assets, however, as is known from initial reactions, not all assets are the same.

The second important thing is to look at macroeconomics and markets together. The According to an analysis by Goldman Sachs, which has been analyzing the performance of the S&P 500 index since 1975, the US stock market has risen by an average of 16% in the macroeconomic environment characterized by a stable 10-year real bond (compared to last year). Accelerates yields and GDP growth. Last year, the market increased by almost 29%, so it is historically very valuable. According to the central bank, real yields are expected to rise this year, but economic growth will slow from last year’s. In this macroeconomic environment, the above figures show that the average annual income is only 8% based on the data of the last 45 years. In line with the rise in interest rates, stock market ratings (e.g. P / E rates) generally fall, and the picture is less encouraging.

Third, say something inspiring, fortunately you may find more exciting investments, but it will not be passive, investing in indices. Based on the above steps of the Central Bank, the sector cycle may continue, which will enhance the role of active asset selection. Value type, low value revolving industries may be winners of tight central bank policies, while growth type and high value, often loss-making companies may be less active. With rising interest rates and a high inflationary environment, the finance and energy sectors may perform better, so it may be worthwhile to weigh them in or pick personal equity investments from here. As these sectors are highly represented in our region, good performance is expected from the funds invested here this year as well.

In short, the sharp change in the direction of the central bank is tightening monetary conditions to keep inflation expectations in check. This year, the US Federal Reserve will not only raise its base rate but also begin to cut its largest central bank bond portfolio.

It has, with minor hurdles, been well received by markets for the time being, but if the Fed takes the threatening punch bowl from investors, the rules of the game will change.

Based on past experience, rating levels generally fall with rising interest rates. It is not possible to say that the stock market will definitely fall, but in this context, other factors will play a major role in making the markets better or worse. Fortunately, economic growth is forecast to be strong next year, allowing corporate profits to continue to grow, which will play a key role in stock market returns. So no need to worry, however, that we are facing a more volatile and difficult year in the markets than 2021.

This article only reflects the author’s opinion, and the Commission is not responsible for the use of the information contained therein.

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