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For too long, more than a year, money management has been relatively straightforward, with an increase in stocks. This instills the anxious feeling that something must go wrong and puts pressure on some of the most savage elements of the stock markets.
Earlier this month, Janet Yellen was in charge of removing some of this foam. At an event organized by Atlantic magazine, the former president of the Federal Reserve, now secretary of the US Treasury, he uttered words that impacted against fear at the heart of some market participants: “Interest rates may need to rise a bit to make sure our economy doesn’t overheat.”
It is almost comical that this will provoke any reaction in the market. The Fed cut rates to zero and activated the stimulus hose in the teeth of the coronavirus crisis last year. Now, fortunately, vaccination rates in the U.S. are high and infection rates are declining. Business is back to normal quickly. In fact, quickly enough to cause bottlenecks and supply problems, from wood to labor.
It is not necessary for a rocket scientist to see how this can turn out. Making predictions is nonsense, but I’m ready to get my neck out here: the next one US interest rate movements will be higher, not lower.
And yet, remove the smelly salts. Following Yellen’s comments, some of the tech stocks that have shone over the past twelve months have vanished, and the Nasdaq Composite finished the day at almost 2%. Yellen herself quickly clarified her observations. He was not “predicting or recommending” a rate hike, which is no longer in his domain anyway.
Some analysts described the Secretary of the Treasury’s words as a bad move that causes volatility. The cooler heads saw it as a statement of obviousness. The reaction of the market only highlights the degree of skin that some investors have become and the caution that words must be chosen by monetary and fiscal policy makers.
“Markets seem determined to live in the past,” wrote Paul Donovan, chief economist at UBS Wealth Management. “Consumer price inflation in all economies tells us about the price of oil a year ago. That’s not a concern, but the markets want to worry about something. “
This week, market movements again suggested that the urge to worry is strong. Tuesday, high-growth technology stocks fallen in anticipation that the US inflation reading on Wednesday would be high. On Wednesday, they he fell again when inflation was shown to be hot.
The latest assessment of consumer prices in the US showed one Ascent of 4.2 percent in April a year ago: the roughest reading since September 2008. Some details were even more striking; used car and truck prices rose 10% in April alone, accounting for much of the global index gains.
Again, however, none of this should come as a huge surprise.
“It looks like Wall Street is climbing the wall of concern,” said Gregory Perdon, co-investment director at private bank Arbuthnot Latham. “Bears are constantly looking for signs that the world will end. They have every possible excuse. The reality is that the only question that matters is whether the reopening is going well or not. And it’s okay. And Europe is coming together. “
The reasonable assumption is always made that the Fed likes to offer an unexpected stimulus. He doesn’t like to crash the system with unforeseen reinforcement measures that restrict financial conditions. Thus, while the central bank has pledged to maintain super accommodative policy even in the event of inflation above target, some rate regulators have begun to mentally prepare the market for a possible return to normalcy. The last few days and weeks show that investors will have to learn to live with this.
Volatility focuses on the actions of whiz-bang technology, which feel like the right place. This is bad news if you are, for example, Ark’s Cathie Wood. Its flagship tracking innovation fund has technology stocks fallen at more than a third of its peak in February.
Shares closely tied to bitcoin and recently listed U.S. companies are also suffering a tough run. All of this is catching up with the shock of the first quarter bond market. Fixed income specialists, a lot of dours at the best of times, went up in price in a rise in inflation earlier this year. It should be noted that while ten-year U.S. yields rose on Wednesday after the release of inflation data, they did not reach new highs.
Investors in companies that are not yet making a profit are in unstable terrain after a spectacular career. For the rest, aside from those who truly believe that the recovery in inflation will slip out of their hands, now is the time to prepare for frequent nerve tests.
katie.martin@ft.com
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