The interest rate policy of the US Federal Reserve has kept the markets busy since the beginning of the year.
The American stock index S&P 500 has lost more than 9 percent since its January 3 high.
The technology index Nasdaq-100 is even worse: since the end of December there has been a minus of 14.5 percent, from 20 percent this would officially be a bear market.
Price losses where the interest rate policy of the Fed is the main explanation.
Martin Hock
Editor in Business.
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Nothing has happened yet, as the Fed made no decisions on Wednesday, as planned.
Nevertheless, the markets awaited the central bank's communication.
But that's where it seems to have stuck.
The market found the statements made by the President of the Central Bank, Jerome Powell, to be “confusing at best and haphazard at worst”, complained Guido Barthels from the fund company TBF.
Initially, the Fed had shown itself to be on the soft side. With reference to an inflation rate that is too high and a strong labor market, she signaled that the conditions for an interest rate hike, which she expects "soon", have been met. For market participants, the message was clear: cessation of net asset purchases as planned in early March, first rate hike in mid-March, central bank money supply reduction later. We expected that and were satisfied.
But in the press conference, Powell spoke of the fact that the economy and the labor market are in much better shape than they were during the last rate hike cycle in 2015. This also requires a different monetary policy response.
Decisions on the pace of interest rate hikes have not yet been made, and the central bank president did not want to rule out a rate hike of 0.5 percentage points in March or further hikes.
There is some scope for rate hikes without hurting the labor market.
On top of that, the inflation forecast is "several tenths" higher than in December.
In addition, one could read from his words that the balance sheet reduction could start as early as June.
German stock market recovers after low
In doing so, Powell reopened the playing field for interest rate speculation.
Will there be four increases or will there be eight in the end?
The markets didn't thank you.
The Nasdaq 100 ended up 0.2 percent up 3.5 percent and the S&P 500 was up 2.2 percent, down 0.2 percent.
The yield on the ten-year government bond shot up from 1.78 to 1.87 percent.
And the dollar appreciated sharply with the interest rate prospects – against the euro from $1.13 to $1.115.
Fed Chairman Powell was satisfied with the market reactions.
Communication with the markets works.
The Fed's line indicates that the pain in the stock market is not great enough for it to take it into account, according to the fund company Nordea.
Rather, it focuses on the average household that invests less in stocks.
On Thursday, this initially also weighed on the German stock market, which opened much lighter but then recovered noticeably.
As so often, he followed the trend in futures trading on the S&P 500, which was showing price gains again around noon in Europe. When the current growth figures were published in New York in the morning, the stock market traders saw themselves as confirmed. In the fourth quarter, the US economy grew at an annualized rate of 6.9 percent, significantly more than expected at 5.5 percent. While the lion's share was accounted for by the replenishment of shrunken inventories, it nevertheless supported the recovery trend. The S&P 500 ended up 1 percent higher, the German stock market rose while the dollar fell again.
Not everyone is unhappy with the Fed.
According to the fund company PGIM, they are trying to present their intentions as openly and transparently as possible and not to unsettle the financial markets too much.
Their flexible, humble stance is in stark contrast to that of the last rate hike cycle.
After all, against the background of, for example, the development of the pandemic, disruptions on the supply side and geopolitical developments, it has a difficult balancing act to perform, as the economic outlook for 2022 is associated with a high degree of uncertainty.
The fact that the Fed, for the first time in many years, is not making any explicit announcement policy (forward guidance) for interest rates is an expression of the extremely uncertain environment, says William Verhagen, economist at NN Investment.
For many observers, this is also the actual cause of the recent price losses.
The situation on the Ukrainian-Russian border is considered a key factor.
The markets could not price these in, writes Verhagen, especially since the situation could become very complicated.
Ukraine and midterm elections
For Fisher Investments wealth manager Ken Fisher, the focus is on the US midterm elections.
Years like this are always difficult.
After the elections things will go up massively.
The analysts at DZ Bank are also trying to look beyond current developments.
The most recent interest rate hike cycles have always initially led to price losses, which have been more than made up for over the course of the cycle.
In the end, the question of the stock market's high valuation remains.
But given the high valuation of all asset classes, there is a lack of options.
Nonetheless, higher yields favor stocks in companies with consistent cash inflows rather than growth stocks whose potential profits lie far in the future.