Growth vs. cyclical value stocks: Investing in a changing rate environment
Stocks climbed after Jerome Powell reassured investors that the Federal Reserve is going to tamp down inflation as the economy rebounds, while signaling the central bank will probably start shrinking its balance sheet in 2022.
The S&P 500 halted a five-day slide, the Nasdaq 100 outperformed major benchmarks and dollar fell. The Fed chief told the Senate Banking Committee that officials won’t hesitate to act if needed to contain price pressures. “If we have to raise interest rates more over time, we will,” he noted. Noting that the economy was in a much stronger position than the last time the central bank shrank its balance sheet, Powell said no decisions had been made, but it would be quicker this time around.
“I’ve referred to Powell before as Goldilocks in a suit, and to a certain extent, I think he played that role once again,” said Steve Sosnick, chief strategist at Interactive Brokers. “While he made the right noises about constraining the balance sheet and fighting inflation, he was very careful to balance that out with a general tone that indicated ultimately, ‘Yes I’m concerned about the market reaction to all of these plans that we have’.”
Powell’s remarks follow comments from other officials favoring a start to shrinking the Fed’s $8.77 trillion balance sheet fairly soon after they begin raising rates. Past experience shows that how the Fed manages its balance sheet matters, although the U.S. central bank has also adapted and in July 2021 it created two standing repo facilities to help ease money-market pressures at times of stress.
In corporate news, CVS Health Corp. said its full-year adjusted earnings for 2021 would be in a higher range than currently expected by analysts. American Airlines Group Inc. will report higher revenue in the fourth quarter than analysts expected as the carrier’s main operations escaped the worst of winter holiday cancellations. International Business Machines Corp. was downgraded to sell at UBS Group AG.
Unfazed by the stock market’s bumpy start to the year, strategists from Goldman Sachs Group Inc. to UBS Global Wealth Management reiterated their bullish calls on bets that equities can weather higher rates and rising bond yields.
“The selloff in some long-duration, high-quality names might be overdone soon,” wrote Goldman strategists led by Cecilia Mariotti. With real yields not expected to move much higher, “valuations are unlikely to become a binding constraint for equities.”
Here are some key events this week:
- EIA crude oil inventory report on Wednesday.
- China PPI, CPI on Wednesday.
- U.S. CPI, Fed Beige Book on Wednesday.
- U.S. initial jobless claims, PPI on Thursday.
- U.S. Senate Banking Committee hearing for Lael Brainard, nominated as Fed vice-chair on Thursday.
- Richmond Fed President Thomas Barkin, Philadelphia Fed President Patrick Harker,
- Chicago Fed President Charles Evans speak on Thursday.
- Bank of Korea policy decision and briefing on Friday.
- Wells Fargo, Citigroup, JPMorgan due to report earnings on Friday.
- U.S. business inventories, industrial production, University of Michigan consumer sentiment, retail sales on Friday.
- New York Fed President John Williams speaks Friday..
Some of the main moves in markets:
- The S&P 500 rose 0.9% as of 4 p.m. New York time
- The Nasdaq 100 rose 1.5%
- The Dow Jones Industrial Average rose 0.5%
- The MSCI World index rose 0.9%
- The Bloomberg Dollar Spot Index fell 0.3%
- The euro rose 0.4% to $1.1366
- The British pound rose 0.4% to $1.3630
- The Japanese yen was little changed at 115.30 per dollar
- The yield on 10-year Treasuries declined two basis points to 1.74%
- Germany’s 10-year yield was little changed at -0.03%
- Britain’s 10-year yield declined two basis points to 1.17%
- West Texas Intermediate crude rose 4.2% to $81.48 a barrel
- Gold futures rose 1.3% to $1,822.40 an ounce