Jerome Powell’s Rate Hikes Will Hurt You
So Jerome Powell has strongly signalled that interest rates will rise to stamp out inflation. This might indicate another large rate rise next month. Mark Spindel, chief investment officer at MBB capital partners has said: ‘failure to back that up with another 75 basis point increase would cheapen his talk’.
The SP500 fell 3.4% and the Nasdaq 100 by more than 4%. I think we can expect more hurt to equities given his strong position. And Nasdaq’s fall really highlights the still high valuations of tech companies.
Notice that Powell’s rationale is to restore price stability. And it looks like a very strong stance – with him even saying price stability will be willingly pursued in return for ‘slower growth’ and that it will bring some pain to households and businesses. Remember, the Fed’s goal is 2%.
So why is inflation so high? It might be that unemployment is just stubbornly high – which means people aren’t picking up jobs as expected. Look at the rise in delivery, warehouse, restaurant, and travel work. Another factor is that work from home arrangements have led to higher standards before jobs are accepted.
And since the labour market is tight, wages could rise. Which is good for you and me, but not so good for controlling inflation. The Economist points out that even if oil prices continue to fall, core inflation will still be fed.
What does this mean? In the very short term, probably not much. Crazy trades and volatility will still exist. In the medium term, consumer staples and strategic defence sectors could be a good bet. And in the long run, I hope you have some savings stashed aside.
Now some crazy extrapolations from Powell’s announcement. First, I think we could dump over-leveraged equities for a while. This includes real estate, some tech stocks that just benefited from the wave in the last few years, and maybe Chinese equities.
The only tech stocks I’m confident on is Intel because it’s related to strategic geopolitical needs. This is compared to more consumer-focused firms like stripe. On the same note, defence stocks like Lockheed Martin may be helped by competition with China, and won’t seem to be hurt as much by the rate rise.
I would also look at some leading renewable stocks right now. Anything that has a strong footprint and ties to American interest would be good. This means renewable power production, more than just another electric car company. The hope is that when things recover, we end up picking renewable stocks that are at a discount now.
Alright that’s all, do tell me if there’s anything particular you want covered.
Sources:
https://www.economist.com/finance-and-economics/2022/08/05/for-a-change-american-inflation-is-lower-than-expected
https://www.economist.com/graphic-detail/2022/07/27/the-fed-is-no-longer-taking-baby-steps-to-rein-in-inflation
https://www.bloomberg.com/news/articles/2022-08-26/powell-says-history-warns-against-prematurely-loosening-policy
https://www.bloomberg.com/news/articles/2022-08-25/china-stocks-rally-may-aid-asia-in-runup-to-powell-markets-wrap