3 Things To Know About The Stock Market Now
Investors are closely monitoring the Federal Reserve’s February meeting minutes for insights into the central bank’s plans for interest rate hikes, amid recent signs of inflation coming down.
However, inflation concerns could lead to enough voting members in the Fed pushing for a larger hike. Signs of inflation coming down are encouraging for financial markets, as high prices and supply chain disruptions were key risks over the past year.
While the majority of central bankers supported the 25 basis point rate hike made earlier in the month, a few believed that a larger hike would be more appropriate to achieve a restrictive stance.
The Fed minutes indicated support for another 0.25% rate hike at the Fed’s March meeting, but recent economic data suggests that a bigger hike of 50 basis points could be considered.
However, Grantham Mayo Van Otterloo & Co warns that the early stock market rebound has already lowered future returns, with returns front-loaded, or borrowed from the future.
The Federal Reserve’s February Meeting Minutes
On Wednesday, the stock market fluctuated as investors awaited and then evaluated the release of the Federal Reserve’s February meeting minutes. The minutes revealed that while more rate hikes are on the horizon, central bankers hold different views on how high the next one should be. The majority supported the 25 basis point rate hike made earlier in the month, but a few believed that a larger hike would be more appropriate to achieve a restrictive stance.
The minutes also indicated support for another 0.25% rate hike at the Fed’s March meeting, but recent economic data, including a strong jobs report, inflation pressures, and solid retail sales, suggest that a bigger hike of 50 basis points could be considered. Overall, the minutes suggested a “wait-and-see approach,” but inflation could lead to enough voting members in the Fed pushing for a larger hike. Despite the uncertainty, investors should focus on high-quality dividend growth stocks, which can provide stability in volatile markets.
Inflation May be Coming Down
Federal Reserve officials at their most recent meeting indicated that there are signs inflation is coming down, but not enough to counter the need for more interest rate increases, meeting minutes released Wednesday showed.
The economy is showing signs of improvement as prices on important products continue to fall and supply chains are slowly getting back on track. This is good news for financial markets, as high costs and product bottlenecks were considered key risks over the past year. Inflation was particularly concerning as it could have led to higher interest rates and a recession, both of which could negatively impact stock prices. However, recent trends suggest that the products which experienced notable price surges last year are now experiencing a slump, including lumber, used cars, oil, and real estate. Other products such as steel, grains, gasoline, cobalt, and eggs are also seeing price drops.
Additionally, supply chain snarls caused by shipping constraints are easing, leading to a more predictable business environment. While prices are still higher than pre-COVID levels, this progress is encouraging as it reduces the need for drastic measures such as rate hikes by the Federal Reserve.
‘Stock Market Rally is Borrowing From the Future,’ GMO Says
Grantham Mayo Van Otterloo & Co, the firm co-founded by prominent investor Jeremy Grantham, provides a quarterly outlook on future returns from various asset classes over the next seven years. According to the latest projection, the early stock market rebound has already lowered future returns, with the returns front-loaded, or borrowed from the future.
Emerging market value stocks remain the best performer with a projected annual return of 8.2% after inflation, although this is down by 1.6 points from the last notice. Emerging market stocks as a whole are projected to return 4.8% annually, down from 5.6% in December. U.S. small and large caps are estimated to experience negative returns of -1.7% and -1.6% annually, respectively. In fixed income, emerging market debt is expected to provide the best returns, with a projection of 3.4% annually after inflation, down from the prior forecast of 4.1%.
GMO, which managed around $72 billion in assets under management as of early 2022, provided this latest projection as a reminder that the early rebound in the stock market could mean that future returns may not be as high. The reduction in future returns can be attributed to the global economic situation, particularly the ongoing impact of the COVID-19 pandemic. However, it is important to note that projections are not guaranteed, and unforeseen events can always occur that could affect future returns.
The Federal Reserve’s meeting minutes reveal a “wait-and-see approach” regarding future interest rate hikes, but inflation remains a concern.
On the other hand, the easing of supply chain disruptions and falling prices of essential products is good news for the economy and could reduce the need for drastic measures such as rate hikes. Meanwhile, GMO’s latest projections indicate that the early rebound in the stock market may have borrowed returns from the future, highlighting the importance of taking a long-term investment perspective.
As always, investors should exercise caution and diversify their portfolios to manage risks and maximize returns. While projections and predictions are helpful, they are not guarantees and should not be the sole basis for investment decisions. By staying informed and staying disciplined, investors can navigate the current environment and position themselves for success in the long term.