May 17, 2022

Great Indian Mutiny

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Why doesn't the stock market 'smoke' even as the Fed signals it's ready to inflate interest rate hikes

Why doesn’t the stock market ‘smoke’ even as the Fed signals it’s ready to inflate interest rate hikes

Short volatility aside, the US stock market is taking Fed Chair Jerome Powell’s decision to fully unleash the anti-inflationary side of his monetary-political personality.

That may come as a surprise to some investors as Treasury yields soar and money market participants pricing in a strong round of record interest rate increases after Powell made clear on Monday that the Fed is the Willing to provide 50 basis points to raise interest ratessomething it hasn’t done since 2000, at upcoming policy meetings if necessary to combat inflation.

“The stock rise has a clear significance, we see the [Nasdaq-100] NDX,
+ 1.81%
That there is strong support below 14,000 even with the 10-year US Treasury yield TMUBMUSD10Y,
2.386%
β€œIt continues to rise above 2% and threatens to break into the multi-decade downtrend,” Chris Weston, head of research at Australia-based Pepperstone, said in a note to clients.

“We should think about why the stock is not smoking,” Weston said.

For his part, Weston said that the fact that the Fed “puts out the big guns in May and uses forward guidance to set the scene before that may be welcomed by the stock market β€” they’ve weighed expectations and feel the credibility of the Fed is a strong Fed, higher rates are better.” from entrenched inflation.

The Nasdaq 100 is up 1.5%, while the high-tech Nasdaq Composite is also up,
+ 1.83%
It rose 1.6%. Technology and growth stocks are seen as being most sensitive to rising treasury yields, which reduces the present value of their future earnings and cash flow which are used to justify higher stock prices. However, the Nasdaq did indeed slip into a bear market earlier this month, dropping more than 20% from its record November close.

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However, stocks have rebounded significantly since the Fed last week began its rate-raising cycle with a 25 basis point increase in the federal funds rate, and indicated that significant monetary tightening was yet to come. Stock indices are now also trading above levels seen prior to Russia’s invasion of Ukraine on February 24.

Dow Jones Industrial Average DJIA,
+ 0.66%
It rose about 205 points, or 0.6%, on Tuesday. S&P 500 SPX Index,
+ 1.03%
It rose 0.8%, with the index of large companies trading at its highest level since February 11.

It’s important to remember that the S&P 500 fell about 15% during its February 24 decline, which means “a lot of bad news has been priced in,” which means that risk/reward expectations have improved since the start of 2022, said Tom Lee, founder of Fundstrat Global Advisors. in a note.

The current market environment, however, is one in which investors should not try to “be a hero” or make a “big call,” he said, as markets are likely to remain volatile.

Pepperstone’s Weston noted that the war between Russia and Ukraine had fueled inflation fears as the prices of crude oil and other commodities rose in volatile trading. While that translates into periods of rough skidding on stocks, funds appear to be “well-protected, there’s tons of liquidity on the sidelines, and the rotation is real,” he said, as traders move into energy stocks as crude oil rises and defensive positions increase in sectors like utilities.