30.05.2022 – Has inflation peaked or not? And how will the Federal Reserve respond? These two questions in particular are important for the stock market. Two investment banks have dared to look into the crystal ball.
Relief for the bulls: Wall Street has recently made up considerable ground. For Citibank, this is mainly due to the inflow of pent-up capital before the end of the month – the institution registered in recent days the highest buying level since March 2020. Also, the latest minutes from the Federal Reserve turned out less hawkish than expected – and so the interest rate fears faded for now. Bear market rally or trend reversal? In any case, the Dow Jones in the daily chart is first trying to return from the oversold situation to the 50-day moving average. The next stop would then be the 200 line above it.
However, there may be other factors behind the recovery. In a roundabout analysis, for example, Goldman Sachs just pointed to the importance of peak inflation. The peak in inflation could herald a recovery for equities. The bank looked back to 1950 and discovered twelve peaks with inflation rates above 3 percent. Normally, the market runs upward after such a peak, it said. We think: The art is thus to recognize the high in the price increase.
However, Goldman Sachs continued, investors need other support on the way up. For example, a strong economy: Interestingly, the peak is sometimes followed by a weak phase in the economy, as happened in the 1950s, 1960s and 1980s. An exception was 1974. Market valuation is also important. In 2001, for example, the stock market continued to fall after the high in inflation because prices were overvalued. After September 2011, it went up again – because the S&P 500 was only valued at eleven times. Also important, according to Goldman, are falling interest rates.
Strong economy – falling interest rates – low valuation
October 1990, he says, is a good example of all these factors coming together: the market rose 30 percent in the 12 months after peak inflation, according to the Goldmen. And then a warning: if inflation remains sticky high – we add: if there is a plateau rather than a real peak – it will be difficult for the stock market. The moral of the story: the bulls need low valuations (so preferably a real sell-off beforehand), a strong economy, a significant dip in inflation, and the end of the rate hike cycle.
Fittingly, JPMorgan attempted a forecast: indirectly, the bank predicted three more 50 basis point rate hikes and then a pause starting in September. We add: If a recession emerges then, rate cuts will be back on the table. We hope that the analyses will help you with your trades and investments – and wish you good luck!
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