How worried market should be about Fed’s hawkish turn
A small shift in language from Jerome Powell had major consequences for markets last week and has investors wondering how concerned they should be about the future.
Indexes bounced around like popcorn, meme stocks spiralled lower and volatility gauges surged in an anxious week for stocks, after the Federal Reserve chairman said officials should weigh removing pandemic support faster and that inflation was no longer "transitory." Throw in rising angst about the coronavirus and it was one of the roughest stretches since the pandemic's outbreak.
At the same time, panic over the thought of an unsympathetic Fed was tempered by the fact that its bond purchases would still continue into next year and by the overall sturdiness of the US economy. Nonetheless, a more hawkish Powell is something investors haven't had to deal with in three years.
Here are views on how dangerous the landscape is--or isn't.
CHANGE IN TONE
On Tuesday, stocks sold off after Powell told the Senate the central bank will soon discuss a faster schedule for withdrawing stimulus. On Wednesday, after seeing the reaction in markets, he had a chance to walk it all back in a speech to the House -but didn't. "People talk about the change in tone from the Fed -- but it's much more than that," said Matt Maley, chief market strategist for Miller Tabak + Co. Anytime in the past when his comments ruffled the market, Powell consequently softened his approach, but this time "he doubled down."
A less-accommodative Fed creates headwinds for a stock market this richly priced, Maley said. Stocks are much more expensive than the last time the central bank tapered. "The key is they went out of their way for 10 months to make sure people knew they'd be very gradual with their tightening -that has changed," he said. "They're hitting the brakes much harder."
REMAINING CAUTIOUS
Bank of America's Savita Subramanian is keeping her wary outlook for the rest of 2021. To her, Powell's comments indicate that the Fed is focused on inflation rather than employment.
"We remain cautious on S&P 500 amid a hawkish Fed tightening into an overvalued market," the head of US equity and quantitative strategy wrote in a note.
Yet she saw one reason for hope: seasonality. Historically, December has been the strongest month for the S&P 500.
SEARCHING FOR CLUES
With the market having recently touched record highs, many investors are likely looking for signals that its run might be over, said Peter Mallouk, president of Creative Planning, which has about $100 billion in assets under management. "Whenever you get near a top where things are just kind of moving along, you're looking for what's going to change the narrative here," he said in an interview.
Still, Powell's inflation acknowledgment could be a good thing. "There had been some serious denial there," Mallouk said. "Now that at least he's recognising that there's inflation, I think that people are worried about the party ending with the tapering, but also people are more concerned about runaway inflation, so I think there is an offset there."
While the market will have to take a breather once the Fed starts to move, most investors view the response as a positive, he added.