14.12.2021 – Interest rate fears are back: Wall Street and the rest of the world’s stock markets are playing it safe. Tapering or not – containment of the flood of money or more cheap money? We will know more on Wednesday, when the Federal Reserve will have its say. Until then, the market is likely to dig in nervously. And Morgan Stanley already sees chaos from a stronger than previously suspected turnaround in monetary policy.
Inflation Expectations Pick Up
Investors got a small taste of the Federal Reserve’s influence yesterday: the New York Fed released a survey on inflation expectations in November. It surveyed 1,300 households. And in the short term, the figure is higher than ever at 6 percent. The medium-term outlook fell slightly. But, “measures of disagreement across respondents…increased at both horizons to new series highs.” What’s more, the majority of respondents believe prices for all goods and services will continue to rise: Gold, rent, college tuition, food, etc.
The study put a damper on Wall Street. Researchers believe that inflation expectations accurately predict real price increases. Quite simply because consumers are the most likely to notice whether dinner in a restaurant is getting more expensive or whether the bottles in the supermarket are getting smaller for the same price. And already a lot of traders have moved back into the camp of those who now believe in a massive tapering – i.e. the throttling of the flood of money – by the Fed.
Bearing turnaround
Fittingly, Morgan Stanley made an interesting about-face: Until last week, MS economists had thought it possible that the Fed would not raise rates. Now, chief economist Michael Wilson warned of two possible rate hikes in 2022. Ergo, the S&P 500 would slide to 4,400 points at the end of 2022. The stock market is in for trouble on a three- to four-month horizon, he said: “the Fed’s pivot to a more aggressive tapering schedule poses a greater risk for asset prices than most investors believe.” The analyst’s bottom line: “the Fed put still exists but the strike price is much lower now, in our view. If we had to guess, it’s down 20% rather than down 10% unless credit markets or economic data really start to wobble.”
Everything is different this time
The current tapering will be far more severe than the tightening in 2014, Morgan Stanley further explained. The differences to then: The Fed is currently saying goodbye to quantitative easing twice as fast. Asste prices are much higher. And growth is flattening out. Wilson also said that the current U.S. government is not focusing much on the performance of the stock market as an indicator of its success.
To which we add: This Biden administration has not a single success to show for it – the border is open, illegal migrants are flooding the country; the Afghanistan withdrawal was a disaster because Joe Biden abandoned the Bagram base that would have kept ISIS and Taliban at bay – Donald Trump would never have left billions of dollars worth of weapons behind either. Corona deaths are higher under Biden than under Trump. And inflation, at 6.8 percent, is the highest it’s been in about 40 years.
Turbo Taper Looms
Like Goldman Sachs, Morgan Stanley now believes the Fed will end its asset-buying program at the end of March. The brilliant financial blog ZeroHedge warned of a “turbo taper.” Our conclusion from all this is that, on the one hand, inflation is pushing up stock prices. Investors are fleeing into tangible assets; companies – for now – have no problem passing on higher purchase prices to consumers, which boosts profits. But will the Fed stand idly by and watch all this happen? We’ll know more on Wednesday night. Bernstein Bank wishes successful trades and investments!
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