By Lewis Krauskopf
NEW YORK (Reuters) – Investors will focus on the Federal Reserve’s monetary policy meeting next week as a “Goldilocks” market environment that has helped lift stocks to all-time highs and tamed a sell-off. Bond is tested by rising inflation.
Stocks have risen steadily in recent weeks and are now at new records, extending a rally that has seen the S&P 500 gain 13% this year and nearly 90% from its March 2020 low. The US government have also rebounded after their first-quarter selloff, with the benchmark index moving inversely to prices, recently at 1.46%, some 30 basis points below its highs of the year. first trimester.
Some of those gains have been based on the Fed’s assurances that rising inflation won’t last long enough to justify an earlier-than-expected end to easy money policies. Signs that the Fed is less and less confident in those assumptions could disrupt equities, which have benefited from quantitative easing, and hurt bonds as rising prices erode the value of debt over the longer term. term.
Investors “will look for signs that the Fed may believe that inflation is more permanent,” said Michael Arone, chief investment strategist at State street (NYSE 🙂 Global Advisors.
The Fed has maintained that it has the tools to deal with accelerating inflation. The central bank may open a discussion at the Tuesday-Wednesday meeting about when to start undoing its purchases of government bonds for $ 120 billion per month, although most analysts do not expect a decision before the annual conference of the Fed in Jackson Hole, Wyoming, in August.
For now, it appears that some investors are embracing the Fed’s way of thinking about inflation. On Thursday, stocks ignored data showing consumer prices rose in May at their fastest annual pace in 13 years, when the S&P 500 hit a new high. By contrast, a much higher-than-expected inflation figure last month prompted a sell-off of shares.
Strong inflation figures aside, recent data has provided snapshots of an economy that is strengthening, but does not appear to be close to overheating. Employment, for example, remains around 7.6 million jobs below its February 2020 peak, while the latest monthly report fell short of economists’ estimates.
“We are making progress, but the economy is not completely on fire and a runaway train where the Fed has to take action,” said Chris Galipeau, senior market strategist at Putnam Investments. “That puts us on the ‘Goldilocks’ stage.”
However, others are concerned that markets have become too accommodating to inflation and other risks that could derail the current rally, from a possible tax hike to peak rates of economic growth.
Analysts at BofA Global Research on Friday outlined a number of reasons why inflation may be more sustained than many expect, including second-tier indicators such as the National Federation of Independent Business’ survey of small businesses showing that Price pressures are seeping into customers.
“The list of excuses for temporary inflation is getting long. The risk of higher and persistent inflation is growing, ”wrote the BofA analysts.
More broadly, bullish sentiment among individual investors has been above its historical average of 38% for 25 of the past 30 weeks, according to the American Individual Investor Association. Bearish sentiment, meanwhile, is below its all-time average of 30.5% for the 18th consecutive week.
“At current levels, pessimism remains unusually low,” the AAII said on its website. “Historically, below-average readings for bearish sentiment have been followed by below-average six- and 12-month returns for him.”
Bulls can point to many reasons for stocks to remain strong. Most investors believe that the Fed will only start reducing its bond purchases in late 2021 or early next year. Bets on Eurodollar futures markets show investors believe the Fed will start raising its benchmark rate in late 2022.
Soaring estimates of corporate earnings growth are also supporting stocks. S&P 500 earnings are now expected to rise 36% this year, compared to an April estimate of 26% growth, and earnings are expected to rise about another 12% in 2022, according to Refinitiv IBES.
That hasn’t stopped some of the world’s biggest banks, including Morgan stanley (NYSE :), based on the warning in recent months that the market is poised for a sharp pullback.
Matthew Miskin, co-director of investment strategy at John Hancock Investment Management, still prefers stocks to bonds, with a preference for the healthcare, industrial, technology and communications sectors.
“Some volatility is expected and we have been saying it, and yet the declines have been met with very strong demand,” he said.