Investors are set to largely shrug off hawkish tones and rate rises from the Federal Reserve moving forward, predicts the CEO of one of the world’s largest independent financial advisory, asset management and fintech organizations. Nasdaq Composite ended February 1 session higher by 2% while S&P 500 closed over 1%. The Nasdaq Composite index gained 11% in January, its best January performance since 2001, while the S&P 500 index gained 6.2%.
The prediction from Nigel Green of deVere Group, comes as the U.S. central bank’s policy-setting Federal Open Market Committee (FOMC) raised rates by 25 basis points at the conclusion of its two-day meeting, bringing its benchmark to a target range of 4.5% to 4.75%. The markets expected a 25bps rise, which is another step downward for the Fed, which increased rates by 50 basis points in December, following four 75 basis-point hikes in 2022.
“There’s set to be some fluctuation, but moving forward markets are going to largely shrug off the Fed’s hawkish tones and rate rises. Markets typically look to the future, not at the present, and will see that inflation has peaked, and the growing signs of a ‘soft landing’ for the U.S. economy as it appears that the central bank is reducing inflation without creating significant unemployment, says Green.
In Powell’s own words, “Although inflation has moderated recently, it remains too high. The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched.”
“The Fed’s decision of 25 bps hike was in line with market’s expectation. While, we await for the minutes of Fed’s meeting to understand the finer nuances, the press conference of Fed chairman was taken very positively by the markets. While, Powell emphasized on the continuation of hawkish stance till the inflation in US declines to 2% level, his commentary affirming hat disinflationary process has started in some parts of the economy ring music to the ears of bulls. It indicates that the downward trend in the inflation will also continue and Fed may not increase policy rates beyond 5%. While the risk on the economy and earnings front still remains, the US market now appears to be pricing only one 25 bps hike before Fed halts this phase of continuous hikes in policy rates. We still remain cautious, since corporate earnings is likely to spring a negative surprise and the economy woes may start taking precedence once euphoria on Fed’s expected policy road map settles” – Mohit Ralhan – Chief Executive Officer, TIW Capital
Markets are receiving the signals sent by Fed but could be taking a different approach. “The Fed’s rhetoric doesn’t appear to be changing, despite the data, and the markets are aware of this. There’s a sense that things are actually better than the Fed is admitting to, in order to stop over-exuberance of the markets.”
As the U.S. central bank steps down from the aggressive tightening agenda, markets are increasingly going to overlook the Fed’s rate increases as they could be becoming less relevant.
Nigel Green affirms: “Savvy investors know that now – in a year in which there will be big winners and big losers – it’s about being invested in the right companies, those which can consistently maintain or steadily grow margin, as well as diversification across sectors, asset classes and regions. A good fund manager will be critical in identifying these winners and losers as the economic cycle moves on.”