Just last week, in our weekly report, we had stated that if there are signs that the economy is picking up and that higher interest rates are justified, there will be bloodbath on Wall Street. Link to last week’s report is here: https://futurewealthllc.com/research/.
As if on cue, following remarks by Fed Chair Powell that reopening of the economy could cause inflation to move up, the stock market started to decline. Technology shares took the brunt and treasury yields climbed causing bond values to drop. It appears that the markets were looking for the Fed to voice some form of support with a possible nod toward adjusting the Fed’s asset purchase program. But, that didn’t happen and the sell off worsened. At its nadir, the Nasdaq had wiped out all the gains for the year and S&P 500 was flat.
By the end of the day on Friday, markets finally began to rebound possibly indicating the worse may be behind us. Or is it?
Future Wealth’s View
When the economy on its way to reopening fully and unemployment numbers start to drop, it is only fair to expect that inflation that has been so low for so long and interest rates that have been the lowest in many years, will inch up. Expecting the Fed to indicate that they will raise interest rates to contain inflation is too much to ask too soon. The economy is nowhere near full employment and inflation would have to be sustained at a level above 2% to warrant the Fed to make any moves.
In many ways, the sell off last week was needed to get some semblance of fair valuation in the markets. Now that we have that behind us, we at Future Wealth, believe that markets will begin to move up again as second and third quarters of this year could present real strong earnings by corporations that would reinforce the “reopening trade” philosophy.
That is not going to stop investors from speculating if the Fed is waiting too long to raise interest rates and in doing so, plant another scare into the market. As always, it is best to take a long term view and not be distracted by day to day stock movements.