Weekly Market Update 04/04/2022
The Federal Reserve is closely monitoring the inflation situation. We think next week’s respective data on consumer and producer prices may be a watershed moment for the central bank because if those readings continue to show very large gains, it may force the Fed to act more aggressively on the monetary policy front. This would increase the likelihood of a 50-basis-point hike to the bench- mark short-term rate at the May Federal Open Market Committee (FOMC) meeting.
The first move by the central bank to combat inflation was a 25-basis-point increase to the benchmark federal funds rate (to 0.25% to 0.50%) at its last (mid-March) FOMC meeting. Overall, the Fed struck a more-hawkish tone, telegraphing the possibility of as many as seven hikes before year’s end.
Central bank leaders also have discussed plans to begin reducing the bank’s balance sheet. It swelled to nearly $9 trillion, as an extended stretch of stimulus measures, including monthly bond buying, flooded the financial system with liquidity at the height of the pandemic and helped to avert a prolonged COVID-19-driven economic downturn.
Treasury market yields are on the rise. The rate on the benchmark 10-year Treasury bond, which was 1.70% on March 1st, recently topped the 2.50% mark. With first-quarter earnings reporting season about to kick off, Wall Street will be looking to see if the rising borrowing costs will have a negative effect on the outlook for corporate profits. If company growth projections, as a whole, are reduced, this may bring increased worries about a slowing U.S. economy and create a slippery slope for the Federal Reserve in its effort to stabilize prices.
Conclusion: Bond prices are falling, which is pushing investors back into equities. Technology stocks rallied in late March after the tech-heavy NASDAQ briefly fell into bear market territory earlier this year. However, with inflation stubbornly high and the central bank tightening the monetary reins, those looking to increase their equity market expo- sure may want to give value-oriented stocks, which tend to perform better in a rising rate environment, a closer look. In general, a well-diversified portfolio of high-quality stocks, including those of the well-capitalized technology companies, may be the winning strategy in what is looking to be a volatile year for equities.