NEW YORK – The Federal Reserve’s hawkish shift is bolstering the case for investors looking to trim risk from their portfolios, as the US central bank trains its guns on surging inflation while giving little indication that it will be swayed by the latest weakness in stocks.
After the Fed’s easy-money policies helped the S&P 500 soar from its March 2020 lows, investors must now contend with uncertainty on multiple fronts as the Fed gears up to raise interest rates and shrink its nearly $9 trillion balance sheet.
“I continue to believe you have to be really conservative in your portfolio today,” said Rick Rieder, BlackRock’s chief investment officer of global fixed income. “The Fed is going to have to see a few more cards on inflation and the economy, and the uncertainty is high.”
At the conclusion of its latest monetary policy meeting on Wednesday, the Fed said it is likely to hike rates in March and reaffirmed plans to end its bond purchases that month in what Fed chief Jerome Powell pledged will be a sustained battle to tame inflation, which by some measures is at its highest levels since 1982.
Fed funds futures, which track short-term rate expectations, are now pricing in a total of 4.4 rate increases this year, up from four expected hikes before Powell’s press conference.
Markets had been jittery ahead of the meeting, with the S&P 500 down 8.6 percent for the year-to-date. That threatened to put the index on the path for its worst January performance in history, ahead of the 8.57 percent decline registered in January 2009, according to Ned Davis Research.
For some investors, the uncertainty means that January’s market swings could be a preview of how asset prices will behave in coming months — a stark contrast from the becalmed markets many had grown used to since the Fed unleashed its massive stimulus programs nearly two years ago.
In addition, questions over how the Fed will act appeared to have made investors more skittish about buying dips in the US stock market, a strategy that proved lucrative over the last two years.
“The Fed has really been the backstop for the market and now the Fed is starting to give the market a lot more rope,” said Andy Kapyrin, co-chief investment officer at wealth manager Regent Atlantic, who has been shifting more of his firm’s assets into value stocks — shares of economically sensitive companies that would benefit from rising rates and shortening durations in his bond portfolios. – Reuters
