The US market will have to relearn how to exist without the Fed's financial injections, which have not ceased since 2008.
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| [Liquidity crisis, USA] |
In 2022, the US market will have to relearn how to exist without the Fed's financial injections, which have not ceased since 2008 and are scheduled to end fully in March. Excess liquidity fueled the surge in share prices, causing many assets to become overbought. The decision to reduce stimulus programmes, announced following the Fed meeting on January 26, was made in response to a strong spike in inflation in the United States, which surpassed 40-year highs. To control these processes, the cost of borrowing must be increased, i.e. interest rates must be raised.
Following the Fed's December meeting, market participants concluded that three rises were possible in 2022. However, the language of the Fed's chairman, Jerome Powell, and members of the Open Market Committee progressively altered expectations to four rises. The Fed meeting, which ended on January 26, where the indicator was predicted to continue in the range of 0-0.25 percent, underscored the regulator's sincerity in the battle against inflation. The asset acquisition will be completed by March, as previously scheduled, and the rate may be hiked at the March meeting. Jerome Powell did not provide specific explanations for the rate objective and the timing of rises, giving the Fed leeway given the current economic situation.
This is a bad omen for the stock market. The rise in bond rates initiates the process of revaluing the fair value of assets. This is particularly true for growth and technology stocks. Profitability growth causes a lower devaluation of the company's future earnings. This explains the Nasdaq Composite's poor performance in comparison to the S&P500 index since the beginning of the year. Value equities are currently preferred by investors above growth ones.
After the Fed's December meeting, market participants learned about the Fed's readiness to fight inflation decisively, but the market was focused on the New Year's Eve rally, and fund managers were focused on receiving annual bonuses, so the market's negative reaction to the committee's decisions and Jerome Powell's comments was avoided. However, it happened already in 2022, following the release of the minutes of the Fed meeting on January 5: market indexes plummeted, and bond rates skyrocketed.
Increasing rates, on the other hand, are hardly the worst of all possible worlds. Much more problematic are the Fed's ambitions to liquidate its massively bloated balance sheet, which has already surpassed $9 trillion. If the Fed begins selling the assets amassed there on the market, the liquidity situation would deteriorate significantly, and share prices may fall.
The S&P500 index has already corrected by more than 10% since January and is now trading around 4300 points. The Nasdaq Composite lost about 15% of its value. Following such a quick loss, a local oversold stock of a number of major solid firms emerged, and we may anticipate the S&P500 index to return to the level of 4550 in the short run. This might be due to strong reporting outcomes. This baton may likely be picked over by Apple Inc. after great data on Microsoft Corporation (MSFT) was released on January 26. (AAPL). Investors will view good financial performance as proof of the economy's stability, and it may entice them to purchase appealing assets that have decreased in price.
However, a comeback does not imply a return to the positive trend. The stock market correction in the United States is becoming more genuine, and it is predicted to begin in May. This is also hinted to by the so-called "January barometer" - a statistical pattern that forecasts the increase of the S & P500 index in the first week of January with a likelihood of 75%, and a reduction in the index with a 50% probability implies a fall or sideways movement by the end of the year. The index's dynamics were negative in the start of 2022.
The market is likely to improve in the near future. However, investors are expected to grow more selective, favouring firms with strong fundamentals, minimal debt, and a good return on equity. Shares of firms involved in logistics, semiconductors, cybersecurity, and lithium batteries may be in demand as industry preferences change to the financial and commodities (metals and energy) categories. Large-cap stocks are more likely to be in demand than silentcap stocks. That is, if there is growth in the market in the near future, it will be focused and not widespread.