Fed Chairman Jerome Powell
The stock market has flourished over the past month on hopes of a dovish policy from the US Federal Reserve (FED). But has this scenario happened before, and will investors be as disappointed this time as before?
According to Deutsche Bank, in fact the market has mispriced 6 times in the past 2 years. That makes some people cautious about this 7th increase in the stock market.
Since late October, the S&P 500 Index is up 9%, amid weaker job growth and cooling inflation. These signals convinced many Wall Street traders that the Fed’s tightening cycle was over. Many predictions even suggest that the central bank will cut interest rates in March next year.
In a recent note, Deutsche Bank reviewed 6 times of mispricing and provided assessments for this time.
1. November 2021: Fears about the Omicron variant of Covid-19
Before the Fed began its tightening cycle in March 2022, central banks foretold impending interest rate hikes.
But the emergence of the Omicron variant in November 2021 raised concerns about new economic uncertainties.
When there was information that this variant could be ineffective against vaccines, investors began to withdraw. But then, the S&P 500 Index recovered spectacularly and reached an all-time high at the end of December 2021.
2. Spring 2022: Conflict in Ukraine
Conflict broke out in Ukraine in February 2022, raising concerns that tensions would widen and hinder global economic growth. This caused the FED to start raising interest rates lower than expected in March.
The S&P 500 index rose 3.6% that month, while bond yields fell.
3. May 2022: More risks appear
China’s zero Covid policy, the conflict in Ukraine and the FED’s start to sharply increase interest rates raise doubts about the central bank’s hawkish stance.
The S&P 500 index rose 6.6% in the week ended May 27, its strongest weekly gain of 2022.
4. July 2022: Global recession?
Predictions of a global recession began to increase, while falling oil prices helped drag inflation down. Fed Chairman Jerome Powell even pointed out that the process of raising interest rates needs to slow down.
The S&P 500 rose 9.1% that month.
5. Autumn 2022: Budget failure in the UK
A UK budget proposal that includes more borrowing has thrown the country’s financial markets into turmoil. That leads to predictions that the Fed will soon stop raising interest rates and then start cutting in 2023.
The S&P 500 index increased 5.7% on October 3-4, marking the highest two-day increase since April 2020.
6. March 2023: Chaos in the US banking industry
The sudden collapse of Silicon Valley Bank (SVB) has led investors to believe that the FED will delay policy tightening and then cut in November.
Yields on 2-year Treasury bonds fell. The S&P 500 rose 7% immediately following SVB’s collapse through the end of March.
Fed Chairman Jerome Powell
What about this time?
For now, the belief that the Fed is finally about to cut interest rates may be correct. But Deutsche Bank points out that the final stage of bringing inflation down to the 2% target is often the most difficult.
When inflation peaks, it is often driven by temporary factors such as energy shocks or supply chain disruptions.
But analysts point out that as inflation begins to decline, the debate turns to whether policy is tightening too much.
Economic experts say it’s difficult to know the answer in real time, because monetary policy has a lag. Therefore, with this 7th scenario, it is necessary to carefully consider the actual conditions.
According to MI
