Accelerating the withdrawal of stimuli forces the search for stock market shelters

New York

We have run into inflation. The Federal Reserve faces one of the most delicate paradigms of the last decades in the United States. While the Consumer Price Index (CPI) continued to climb in November, accumulating a year-on-year rise of 6.8%, the highest since 1982, the world’s largest economy still has to generate at least 3.9 million to regain levels. recorded before the tumultuous impact of Covid-19.

A context where the president of the US central bank, Jerome Powell, and the rest of senior Fed officials will have to juggle to anchor inflationary expectations without preventing the withdrawal of stimulus from disrupting their path to full employment.

For the moment, the blunders when it comes to calibrating the transience of the price increase experienced in recent months will force the Federal Open Markets Committee of the Fed (FOMC), in charge of dictating monetary policy, next week. on this side of the Atlantic, to accelerate the pace in reducing its asset purchases.

This process, also known as tapering in financial jargon, has cut monthly purchases since November by $ 10 billion for Treasuries and $ 5 billion for mortgage-backed assets (MBS). in English).

The Fed’s balance sheet

A moderate restriction if we bear in mind that until then the Fed gobbled up 120,000 million dollars a month since March of last year as one of the emergency responses to protect the US economy from the coronavirus. Since then its balance has more than doubled to $ 8.6 trillion at the end of November.

However, as some monetary hawks anticipated, the insistent rise in inflation has played a trick on the hypothesis of the FOMC, which until not long ago argued that the rise in prices alluded to transitory elements, such as base effects as well. such as supply chain disruptions. A defense that will disappear on December 15 when the Fed announces the conclusion of the last two-day monetary policy meeting, which will be accompanied by the update of the macro table, the dot plot on future rate hikes and the usual Powell’s press conference.

“The biggest problem for the Fed is the growing evidence of a strong pick-up in cyclical pressures on prices. Although we think headline inflation has peaked, it will only decline gradually during the first half of next year and, above all, due to With mounting cyclical pressure, we expect core inflation to remain above the Federal Reserve’s 2% target for an extended period, “says Paul Asworth, US economist at Capital Economics.

Quality is the best hedge against market volatility, according to experts

That is why the market and the different investment desks already have more than discounted that the FOMC will double next week the pace in the reduction of its asset purchases to 30,000 million dollars per month (20,000 million dollars in Treasury bonds and $ 10 billion in MBS). Stepping on the accelerator and carrying out a “turbo-tapering” will allow the central bank to complete its process in the first quarter of next year, probably as early as March.

Thereafter, the track will be clear for the start of the next cycle of interest rate hikes. A takeoff, which according to the consensus will occur in June with the first increase of 25 basis points. This will be followed by two others, one in September and one in December. That said, expectations vary.

The beneficiaries include the financial, automotive and energy sectors, among others

As Edward Moya, senior market analyst for OANDA, explains to elEconomista, the accelerated reduction in purchases by the Federal Reserve “will trigger a flight to havens within equities that will lead investors to buy technological securities.” “What complicates this move away from risk is the growth outlook, which will remain mostly intact for next year, possibly at 4%. It is possible that the Federal Reserve was wrong about inflation and that. it could lead to a rate hike race, which could increase the risks that the economy will head in the wrong direction after next year, “he adds.

For his part, Sam Stovall, CFRA investment director, makes use of historical perspectives when analyzing, when asked by this newspaper, the impact of an acceleration in tapering to 30,000 million dollars a month and the risk of more permanent inflation.

In this regard, it indicates that, since 1949, each time there has been a monthly increase in year-on-year CPI growth, the S&P 500 has continued to rise, albeit at a slower rate, around 5.5%. From a sectoral perspective and since 1970, the leaders in this regard have been energy, materials and technology, while the laggards have been consumer discretionary, financials and utilities.

The S&P 500 advances 12.5% ​​on average between 9 and 12 months before the first rate hike

Historically, the S&P 500 has risen 12.5% ​​on average between 9 and 12 months before the first rise by the Federal Reserve, then consolidated for more than 3 months. That said, US equities are the worst performer after a rate hike when inflation is high (more than 3%), registering an average drop of 7.5% in the following four months.

For Keith Parker, strategist at UBS in New York, the reduction in asset purchases and a more aggressive Fed could drive up real yields. Under this scenario, the biggest beneficiaries would be the financial, capital goods, automotive and energy sectors. Utilities, real estate, food and beverage as well as pharmaceuticals would perform relatively poorly, in his view.

At Morgan Stanley, its strategists expect lower valuations in 2022 and consider that an acceleration in tapering does nothing more than advance these perspectives, hence favoring “the defensive quality of the large capitalization.” At Bank of America Securities, its strategist, Savita Subramanian, reiterates that “quality is the best hedge against market volatility, and a cycle of Fed raises means that cash goes from being worth nothing to being worth something.”

The preferred sectors for Subramanian tend to have high free cash flow and high quality. Within large-cap companies, he advocates those with stable and growing dividends, which will benefit from inflation rather than be hurt. That is why it mentions the energy and financial sector, for its inflation-protected dividends and the healthcare sector, for its secular growth at a reasonable valuation. It also confesses that it is thinking of overweight information technology, due to its quality and the strength of its balance sheet, as well as the benefits of investments in automation of labor-intensive companies.

Marko Kolanovic, JP Morgan’s chief global strategist, expects two rate hikes next year and believes that much of the rise projected by the S&P 500 in 2022, which should reach 5,050 points, will occur between now and now. first half of next year. Kolanovic speaks of strong earnings growth. Of course, the rate hike projected by the Federal Reserve could drive a certain reduction in risk and a correction within the upward cycle.

In these circumstances, this strategist advocates maintaining a pro-cyclical bias, especially in light of recent declines, with a preference for sectors sensitive to reflation such as energy and finance, consumer services, healthcare and small caps. In his view, technology should continue to offer a solid foundation.

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