(Bloomberg) — As the Federal Reserve’s intensified fight against inflation is sinking all assets on Wall Street, investors are asking: Why buy now when things can get even cheaper?
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What started this month as a mild sell-off in stocks has turned into a falling interest-driven rate that has wiped out virtually all summer gains in the S&P 500. are increasingly parking their money in cash, waiting for more central bank-induced pain to the economy — and a better buying opportunity. At the same time, the debt debacle of Citrix Systems Inc. the tighter environment for raising capital for Corporate America, making the outlook for stock market debt companies bleaker.
All of this comes at a bad time for companies dealing with shrinking profit margins. Stock valuations, while below multi-year highs, may have to fall further after the S&P 500 doubled from the pandemic floor. And even with nominal government bond yields at their highest level in more than a decade, inflation-adjusted rates still have room to climb further.
Jerome Powell and his Fed colleagues will not be upset about the sharp fall in asset prices. They have been saying for the past six months, first subtly and then directly, that inflation cannot fall until the excesses in the financial markets subside. Since the central bank started tightening in March, 10-year yields have risen more than 1.5 percentage points, equities have fallen 20% and junk bond spreads have widened by about 90 basis points. More pain is likely.
“The Fed’s message is that ‘we will continue to walk until something goes wrong,’” said Bespoke Investment Group Global Macro Strategist George Pearkes. “The fact that nothing’s broken yet tells us we’re not done yet. If the Fed is in that mood, how are the markets supposed to bottom out?”
With the S&P 500 falling for the third day in a row on Thursday, following its worst Fed-day performance since January 2021, it seems investors are finally heeding the central bank’s message: After the era of maximum monetary stimulus, asset and price disinflation is a necessary by-product of price pressures in the wider economy.
Neel Kashkari, the president of the Minneapolis Fed, said that in late August, noting that he was “glad” to see the market sink in response to Powell’s speech in Jackson Hole, where Chairman Jerome Powell insisted that the central bank was determined was to eradicate inflation.
Powell repeatedly referred to the labor market at Wednesday’s press conference, noting that its strength remains “unbalanced” as policymakers try to get a handle on the highest inflation rate in a generation.
After breaking a quarterly consecutive outflow in August, more than $5 billion has been withdrawn from U.S. exchange-traded funds, Bloomberg data shows. Meanwhile, the more speculative corners of the market are being punished. A Goldman Sachs basket of unprofitable tech companies is down 12% so far in September, heading for its worst monthly performance since May.
“If there are more aggressive sellers and less aggressive buyers, that supply/demand imbalance is sure to cause a disinflation in stock prices,” Art Hogan, chief market strategist at B. Riley, said in a phone call. “And as far as that’s what we’re going through right now, it’s akin to declining demand for other things.”
Despite prices continuing to fall across all asset classes, there are no major signs of investor panic, such as forced liquidations or systemic stress. Financial conditions – an overarching measure of market stress – are closer to the levels that led to the Fed’s kick-off hike in March. Although credit issuance has slowed, investment-grade companies are broadly still able to tap primary markets, albeit at a price.
Against that background, it makes sense to wait for bigger bargains with the Fed on the warpath, according to Kim Forrest of Bokeh Capital Partners.
“The Fed has mapped out this strategy to kill inflation and it looks like it will kill the economy as well. And that’s why we’re on a buyer’s strike,” Forrest, the company’s founder and chief investment officer, said in an interview. “The whole thing is I was sitting there this morning looking at things I want to buy and my big question is this: are they going to be cheaper next month? And the answer is maybe. Could be.”
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