When may this occur? Don’t hold your breath. Investors’ obsession with interest rates will likely persist until the market finds a bottom. It is unlikely that equity markets will find a bottom while the Fed is tightening monetary policy. We saw the NASDAQ Composite recover in October 2019 as the Fed became more accommodative. We saw the NASDAQ Composite go off to the races beginning in April 2020 as the Fed became more accommodative to combat COVID and to subsidize fiscal spending. The Fed can’t afford to be so quickly accommodative today because 8-9% CPI hangs over the economy. CPI was only in the 1.4-2.3% range during 2020. It was only in 2021 that CPI started to accelerate on account of fiscal spending related to COVID relief.
Coming out of Friday’s Fed call it sounds to us that the Fed will raise rates through the top of the year and then hold its position for a number of months. The wildcard in this tightening equation will be the Fed’s Balance Sheet. When the Fed ultimately ramps QT to $95 billion per month, the outcome will likely be higher Treasury yields and therefore higher rates/ higher cost of capital across the real economy. Moving the Fed Funds Rate higher combined with QT will put further downward pressure on risk assets, including equities. Therefore, we do not believe that a market bottom nor a return to fundamental investing will occur before Q1 of 2023.
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