Hawkish Fed spooks global markets

Earnings and valuations are unappealing, while another headwind is an increasingly hawkish central bank, says Andrew Van Sickle.

A year ago, many major stockmarket indices hit new all-time highs. Since then, however, they have struggled, sliding sharply last summer and in early 2016 before finding their feet. It has been 21 years since a US bull market has gone a full year without making a new high, according to Bianco Research.

And the bulls may have to be patient. Earnings and valuations are unappealing, while another headwind is an increasingly hawkish central bank. Nor does the calendar bode well. As Royal London Asset Management's Trevor Greetham told the FT, world stockmarkets have returned an average of 10% a year in US dollar terms, including dividends. But in May to September, the mean return has been around zero.

"The tortured dance" between markets and the Fed had been suspended in recent months, says the FT's Michael Mackenzie. The Fed made soothing noises after investors reacted stroppily to its December interest-rate hike. A June rate hike was widely deemed off the table. But last April's minutes, along with a series of recent pronouncements, madeit clear this could not be taken for granted.

Talk about confirmation bias, says Deutsche Bank. Since Janet Yellen "delivered her dovish coos" in April, investors have focused on weak April payrolls, an uptick in jobless claims and lacklustre housing data "to justify their complacency" about rate hikes. They could instead have taken into account a jump in retail sales and strong industrial production. Investors have been in denial about the strengthening economy.

Whether or not the Fed does actually hike this summer, or finds another reason to sit on its hands and thus tacitly encourage the stockmarket rally to keep going it may have to stop faffing about like this much sooner than it thinks. It "will be forced to raise rates much more aggressively than markets expect", predicts Capital Economics. Inflation is making a comeback, and the central bank is in danger of falling behind the curve.

The surge in the dollar and the fall in oil prices, two key trends that kept a lid on prices in 2015, are fading quickly. Inflation posted its biggest month-on-month jump in three years in April. The commodity bounce implies an annual rate of 2% by the second half of 2016, and 3% early next year. Core inflation is already above 2% year-on-year, close to a four-year high. It looks as though global stocks are in for a nasty surprise.

Recommended

How rising interest rates could hurt big tech stocks
Tech stocks

How rising interest rates could hurt big tech stocks

Low interest rates have helped the biggest companies to entrench their positions. But what if rates rise?
25 Oct 2021
Green finance is set to be the most powerful financial repression tool yet
Bonds

Green finance is set to be the most powerful financial repression tool yet

The government has launched its “green savings bond” that offers investors just 0.65%. But that pitiful return is in many ways the point of “green” fi…
22 Oct 2021
Andrew Hunt: why it's a great time to be a deep value investor
Value investing

Andrew Hunt: why it's a great time to be a deep value investor

Merryn talks to Andrew Hunt, author of Better Value Investing, about his adventures in the market's dark underbelly, looking for the hated and neglec…
22 Oct 2021
Equities are not a good inflation hedge
Economy

Equities are not a good inflation hedge

Institutional investors are definitely now worried about inflation. But they're not yet worried enough to flee to cash, says John Stepek
22 Oct 2021

Most Popular

Properties for sale for around £1m
Houses for sale

Properties for sale for around £1m

From a stone-built farmhouse in the Snowdonia National Park, to a Victorian terraced house close to London’s Regent’s Canal, eight of the best propert…
15 Oct 2021
How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021
Emerging markets: the Brics never lived up to their promise – but is now the time to buy?
Emerging markets

Emerging markets: the Brics never lived up to their promise – but is now the time to buy?

Twenty years ago hopes were high for Brazil, Russia, India and China – the “Brics” emerging-market economies. But only China has beaten expectations. …
18 Oct 2021