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Hawkish Fed Posturing Weighs Heavily On The Market

By Louis Navellier. Originally published at ValueWalk.

Goldilocks Rate Hike Balance Sheet Runoff end of coronavirus stimulus checks

In his Daily Market Notes report to investors, while commenting on the hawkish Fed, Louis Navellier wrote:

Hawkish Fed Consequences

More hawkish Fed posturing weighs heavily on the market.

News that the Fed will be proposing an aggressive run off of their massive balance sheet has heightened concerns that interest rates may rise faster than previous expectations. This would have several negative consequences, most powerfully a downward pressure on P/Es which would indiscriminately challenge many growth stock valuations. 

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Rising Fears

Add to that the high current inflation trends inevitably raising costs for many companies making profit margin compression likely, further lowering traditional valuation metrics. Fears are rising that the record-setting earnings estimates for the 2nd half of 2022 will be cut following anticipated weak guidance given by management teams in the upcoming 1st quarter earnings calls.

Longer-term, it is actually good that the Fed is finally tackling inflation trends, wherein they note that inflation is now far beyond the wage increases most people can hope for. As mentioned before, while stocks will likely make downward valuation adjustments to absorb these trends, there is nowhere else you can invest which can generate returns than can outpace current inflation trends.

Bond prices will be falling as rates rise, credit spreads will likely widen along the way, and the highest Fed Funds rates forecast are for 3%, still well below inflation.

Buying Opportunity

The conservative expectation trends can already be seen; since March 29th, utilities are the best-performing industry sector, up 2%, followed by consumer staples, up 0.3%.  Energy is flat after a strong run-up, while Health Care (-0.8%) and Metals and Mining (-1%), up on strong commodity trends, are reflecting the lowest price losses.

The pendulum is likely to swing too far and very attractive buying opportunities should present themselves before a new equilibrium is reached.  Take a hard look at your high valuation holdings (i.e.; big P/Es) and take another look at valuation names, especially those with supporting dividend yields, and keep some powder dry for the coming opportunities.

Coffee Beans

Following Ukrainian President Zelenskyy’s official request for his country to join the EU, a recent survey by YouGov in the key EU countries of Germany, France, Spain and Italy, revealed that between 42 and 60 percent of respondents said they think Ukraine should be allowed to become a member of the union. Source: Statista. See the full story here.

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