A screen displays the Fed rate announcement as a specialist trader works at his post on the New York Stock Exchange NYSE in New York City, U.S. January 26, 2022. REUTERS Brendan McDermid
NEW YORK, January 27, Reuters - The Federal Reserve hawkish shift is bolstering the case for investors looking to trim risk from their portfolios, as the U.S. 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 deal with uncertainty on multiple fronts as the Fed gears up to raise interest rates and shrink its $9 trillion balance sheet. Rick Rieder, BlackRock's chief investment officer, said that "I continue to believe that you have to be really conservative in your portfolio." The uncertainty is high because of the fact that the Fed is going to have to see a few more cards on inflation and the economy. At the conclusion of its latest monetary policy meeting on Wednesday, the Fed said it was likely to hike rates in March and reaffirmation of plans to end its bond purchases that month in a move that was pledged by Jerome Powell to be a sustained battle to tame inflation, which by some measures is at its highest level 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 were jittery ahead of the meeting, with the S&P 500 down 8.6% for the year-to-date. The index was on the path for its worst January performance in history, ahead of the 8.57% decline in January 2009, according to Ned Davis Research.
There were questions about how the Fed will act, which made investors more skittish about buying dips in the U.S. stock market, a strategy that has been lucrative over the last two years. Andy Kapyrin, co-chief investment officer at RegentAtlantic, said the Fed has been the backstop for the market and now the market is starting to get more rope, as he has moved 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.
RJ Gallo, senior portfolio manager at Federated Hermes, believes that the Fed will raise rates in 25 basis point increments for the rest of the year starting at its March meeting. His firm has shortened the durations in its portfolios in anticipation that the yield of the 10 year Treasury bond will be over 2% by the end of the year, up from the current 1.77%.
The Fed and inflation are going to dominate the markets for the entire year of 2022, Gallo said. This year, nothing has suggested that inflation will unwind, and the only way they need to address it is rate hikes and to shrink the balance sheet. Powell's comments on Wednesday sent yields on U.S. Treasuries higher and flattened the yield curve. Some investors are worried about the potential for the Fed to tighten so aggressively that it risks a sharp growth slowdown and have been focusing on the flattening yield curve as a potential warning. Steve Bartolini, portfolio manager at T. Rowe Price's New Income Fund, said that the portfolios were relatively conservative to begin with because they believe that more persistent volatility is something that tends to happen at the dawn of tighter cycles and a flatter yield curve. Tech stocks have been the worst hit in recent weeks, with the Nasdaq Composite Index down 13.4% for the year. The price of cryptocurrencies has plunged, taking bitcoins down around 20% year-to-date.
Brian Quigley, portfolio manager at Vanguard Fixed Income Group said that we have to be cautious with regards to positioning for risk assets. I wouldn't be surprised to see more equity weakness, see more spreads of corporate bonds.