In a landscape where stock markets are surging, it's easy to overlook the undercurrents of central bank activity, remarked Reuters' Naomi Rovnick. Despite the fiery performance of markets, the reality is quite different. The U.S. Federal Reserve, for instance, halted its most assertive interest rate rise cycle in decades this week, though it simultaneously issued a cautionary statement about potential future hikes.
Fed Chairman Jerome Powell's recent announcement left rates unchanged, albeit with a forecast of more increases on the horizon. Concurrently, the European Central Bank has undertaken another rate hike, and it's broadly speculated that the Bank of England will do the same shortly.
Yet, amidst this central bank activity, markets appear to be undeterred, commented Rovnick. The S&P 500 index on Wall Street has stormed into a bull market territory, resulting in a 14-month high by Thursday's close. In fact, MSCI's comprehensive measure of global stocks is anticipating a 2.9% weekly increase. This has transpired despite Powell's assertion that the job market and economic growth have been stronger than predicted, necessitating a longer fight against persistent inflation.
Markets, however, are choosing to focus on the positives, leaning towards the growth narrative, and pushing back against hawkish guidance, added Rovnick. This skewed perspective implies a drastic need for a fresh strategy among investors.
At the start of the year, numerous investors anticipated a brutal recession due to rate rises, which they believed would crush equities and redirect cash towards government bonds. Now, with 10-year Treasury yields lingering at their January levels and stocks rallying, those who continue to trade under this premise are likely struggling to justify their stance.
According to Rovnick, this has prompted fixed income portfolio managers to pivot towards growth trades in high yield bonds and emerging market debt. Simultaneously, equity investors are escalating their bets on tech giants due to the anticipated productivity enhancements offered by artificial intelligence.
Yet, the threat of a recession still looms, even as Bank of America economists this week rescinded their predictions for a U.S. downturn. However, they also cautioned that continued Fed hikes could instigate stress in the banking sector and potentially ignite a credit crunch, particularly impacting the small businesses that comprise approximately 50% of U.S. employment.
Ultimately, Rovnick observed that professional investors are trapped between a rock and a hard place: either adopt a narrative they may not fully believe in or miss out on potential profits. With this in mind, the coming summer could present a challenging landscape for traders.
Footnote:
1 adapted from source: "Morning Bid: US Stocks fight the Fed as markets still not listening." Reuters, 16 June 2023, www.reuters.com/markets/us/global-markets-view-usa-2023-06-16.
