Equity markets came under pressure this week after the Fed sent signals to tighten monetary policy more quickly. These are the consequences for investors.
A 14-page paper from the US Federal Reserve has caused nervousness in the global financial markets this week. The minutes of the Open Market Committee meeting on December 14 and 15, published on Wednesday, show that those in charge of the Fed could tighten monetary policy more quickly than previously expected. This has implications for the entire global economy. The goal of more aggressive rate hikes would be to prevent the American economy from overheating while inflation rises.
Indices such as the S&P 500, the DAX, but also the SPI lost markedly in value after the minutes were published. Particularly growth stocks came under pressure. The situation eased slightly on Friday, but darkened again in some cases after the publication of disappointing American labor market data.
In the euro area, too, inflation is the focus of the financial markets: the Eurostat statistics office reported on Friday that consumer prices rose by 5 percent in December compared to the previous year – this is the highest inflation rate since the introduction of the common currency.
Increased risk of recession
The economist Klaus Wellershoff emphasizes what is currently particularly unsettling the financial markets is a scenario in which the American central bank has to cut back its expansionary support measures due to inflationary tendencies, while the economic outlook is gloomy due to the wave of Omikron contagion. “The central banks have one hand tied behind their backs due to the rise in prices. They can no longer act as freely as would be necessary from the perspective of the financial markets, ”says Wellershoff, who, with his business consultancy firm of the same name, advises industrial groups and financial service providers on economic issues. Typically, monetary and fiscal policy can rarely prevent economic setbacks, but usually only alleviate them afterwards, he says.
Wellershoff does not yet consider a recession in the year that has just started to be the core scenario, but he believes the probability “that the economy will rain down on us in the course of the year” has been significantly increased since last November. The currently extremely high excess demand for goods in the United States of over 20% will sooner or later decline – with consequences for the global economy. In order for 2022 to really be “a decent business year”, demand for services must then pick up at the latest to compensate for the decline in goods – the mere stagnation at the current level is not enough. Measures such as the home office obligation are a problem for company-related service providers such as management consultancies, lawyers or trust companies, because the acquisition of new customers and the implementation of complex projects from the home office are hardly possible.
Wellershoff also sees the risk of an economic decline as increased because the governments in the new year no longer boast fiscal support measures and aid programs as they did at the beginning of the pandemic. From a debt perspective, this should be seen as positive, but unpleasant for the economy.
Investors would therefore have to be prepared for lower returns after the “fantastic investment year 2021” for stocks, commodities, real estate and other asset classes. “If there was a rapid change in monetary policy, it would be very difficult for the financial markets to digest. I think a certain restraint is appropriate. ” The same applies to the real estate market, where normalizing mortgage interest rates of three to four percent would certainly have “very negative effects” on valuations, according to Wellershoff.
In the current environment, Wellershoff advises customers to diversify their portfolios broadly and to reduce risks.
Value stocks instead of growth stocks
Adrian Schneider, chief strategist at Graubündner Kantonalbank, sees the risk of an inflation-driving wage-price spiral as increased based on the latest labor market data from the United States. While the number of employees has increased less than expected, the average hourly wages have risen – these cost jumps put pressure on the profit margin of companies. “That’s not ideal for the stock markets.” For the time being, the environment for equities will remain attractive, but due to the upcoming interest rate hikes, value stocks with cheaper valuations will benefit rather than growth values.
With a view to the SMI, these are, for example, the shares of financial service providers such as UBS, Credit Suisse and Swiss Re, but also the building materials manufacturer Holcim. But growth stocks like those of the chemical and pharmaceutical company Lonza, the computer accessories manufacturer Logitech or the Partners Group would come under pressure. The bank is currently advising customers to adopt a balanced portfolio strategy with a slight overweighting of value stocks.
The development in the market for cryptocurrencies also remains turbulent. Due to the possible rate hikes by the Fed, the price of Bitcoin – analogous to the prices of growth stocks – collapsed again. Nevertheless, the optimists in the crypto world are still in good spirits: At the beginning of the week, Goldman Sachs analyst Zach Pandl wrote that the Bitcoin price could one day break through the $ 100,000 mark if the crypto currency could continue to erode market share from the precious metal gold .