The Fed just aggressively hiked 75 bp in the midst of the first major correction since 2009, making clear the game has changed, and we’re into a whole new cycle. While the market correction remains ongoing, when it flips, it will flip swiftly. Already there are positive signals to be seen – but only if you look outside the box.
Some of the heat was taken out the escalating China Syndrome yesterday when the Chinese regulator held a “secret” meeting with global firms, while Jay Powell took the pressure out of immediate taper fears. Both issues remain sources of massive future pressure on markets – they are sorted for now, but not resolved!
What Inflation? “Oh, that’s nothing to worry about, the central banks have no choice but to keep juicing markets”… The market is so focused on the short-term and ignoring the consequences of the last 10 years of QE, monetary experimentation and easy rates, that its blundering into the next crisis. Inflation matters, and has jumped from financial assets into the real economy.
As vaccine wars hot up and markets worry about interest rates and central bank action, the theme of price distortion continues to unsettle valuations. One aspect of distortion is in the increasing weight being put on ESG metrics – which should be market positive, but look to be vulnerable to Woke-like “doubleplusungood” groupthink, potentially further distorting markets.
Central Banks are playing the “lower for longer” interest rate card to reassure markets on growth. There are always consequences of such actions – ranging from bubbles, delusion and fraud. Eventually consequences trigger change, and reassessment – which is driving the rotation from Hope as a Strategy Tech into Fundamental stocks – Autos are a good example.