New York (AP) —The job of the Federal Reserve Board, once its longest chairman, is to “remove the punch bowl as soon as the party begins,” which is exactly what Wall Street is now Chairman Jerome Powell’s comment. This is a message taken from. this week.
Shares have fallen after Powell said the Fed could stop huge support for financial markets sooner than Wall Street expected. However, history suggests that stocks are not always the losers when the Fed withdraws its support.
Some economists and investors have already sought such a move given the strong economic recovery from last year’s short recession and the stubborn persistence of high inflation that is sweeping the world. ..
But the S & P 500 is 1.9 a day after Powell said the Fed’s monthly bond purchases, which recently began shrinking from $ 120 billion, could end months earlier than its June target. % Has fallen. In addition to concerns that the new coronavirus will dominate the world, it has boosted Wall Street’s so-called “fear gauge.”
There are reasons for concern on Wall Street. The early suspension of the Fed’s bond purchase program, which keeps long-term interest rates low and thereby supports the economy, will open the door for central banks to make more influential decisions to start raising short-term interest rates.
One of the main reasons the S & P 500 has nearly doubled since its four-year low in March 2020 is that it has been fixed at record lows near zero since the early days of the pandemic. .. I’m worried that the stock price may be too high or too fast.
For example, investors buying a 10-year Treasury are seeing yields of only 1.44%, even though they are not keeping up with current inflation levels.
Josh Wayne, Portfolio Manager for the Hennessy Fund, said:
To see how it lifted Wall Street, think about what investors are paying for every dollar of corporate revenue. According to FactSet, the S & P 500’s price-earnings ratio is trading at nearly 24 times the profit per share it has generated in the last 12 months. This is well above the level just below the average price-earnings ratio of 18 over the last 20 years.
But even after the Federal Reserve has begun to raise interest rates, stock prices can continue to rise. Such rate hike campaigns usually occur when the US economy is strong enough to be self-sufficient without the support of a central bank. And in itself, it can boost corporate profits, which is the lifeline of the stock market.
According to BofA Global Research, since 1983, the S & P 500 has recorded positive returns 12 months after the launch of six out of seven rate hike campaigns. The average rate of return was 6.1%.
After the first rate hike, even after extending the period to two years, the S & P 500 maintained positive returns for all but one.
Indeed, according to Savita Subramanian, an equity strategist at BofA Securities, one exception is similar to today’s market. The S & P 500 was much higher than usual in 1999 in the dot-com bubble, and the price of the S & P 500 was trading at 30.5 times the earnings.
The historical record of US stock performance when the Fed delayed bond purchases is not that deep. This is because such bond purchase programs have become a routine part of central bank toolboxes since the 2008 financial crisis.
Equities struggled a bit in the summer of 2013 when Federal Reserve Chairman Ben Bernanke suggested that bond purchases could begin to slow or taper off. It surprised investors, and subsequent market minisoons became known as “tapered tram”.
However, stock prices soon returned to rising. The Federal Reserve did not raise short-term interest rates until late 2015, more than two years after the tapering Tantram.
“Some people are worried that the end of the taper will accelerate the point of rising interest rates, but concerns about rising interest rates will contribute to market turmoil in the short term,” said Chief Investment David Bernsen. I don’t think it will happen. ” An officer of the Bernsen Group.
Wall Street balks as the Federal Reserve signals the end of the party, but is that so? | WGN Radio 720
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