Financial markets will remain turbulent through the summer as the Fed hikes interest rates

FFinancial markets took a beating last week in response to searing inflation figures and an expected interest rate hike from the US central bank, raising fears that a recession is looming on the horizon.

U.S. stocks entered bearish territory on Monday, June 13, with the S&P 500, a benchmark index for Wall Street, falling 3.9% to its lowest level since March 2021. The decline marked a drop of more than 20% from a record. in January and capped off two years of largely steady growth.

The plunge followed the federal government’s latest release of monthly inflation data showing that people in the United States continue to pay skyrocketing prices for everyday goods and services despite recent Federal Reserve measures. to reduce record inflation levels.

Inflation and market decline present a tricky challenge for U.S. policymakers looking to rein in soaring prices for consumers while potentially triggering an economic meltdown that could lead to major job losses.

“The Federal Reserve is in a very precarious position because it has to walk a very fine line between aggressively fighting inflation but also at the same time not tightening monetary policy too much to the point of leading to a recession,” Dave said. Sekera, the chief U.S. market strategist for Morningstar, an investment research firm, told the Washington Examiner by email.

World Bank President David Malpass recently said that “for many countries, recession will be hard to avoid.”

“The war in Ukraine, lockdowns in China, supply chain disruptions and the risk of stagflation are hammering growth,” he said in a statement. Press release June 7. “Markets look to the future, so there is an urgent need to encourage production and avoid trade restrictions. Changes in fiscal, monetary, climate and debt policies are needed to tackle capital misallocation and inequality.

On Friday, the Bureau of Labor Statistics reported that the consumer price index, a key inflation marker, rose 8.6% over the past year, beating financial experts’ expectations. The 12-month jump was the biggest increase since December 1981 and was driven by rising prices for food, fuel and housing, the bureau said.

The Fed began raising interest rates in March for the first time in years, approving a quarter-point hike in March and a half-point hike in May, while signaling that she would likely take similar action this summer.

But May’s inflation numbers turned the tables and the market started to trade on Monday. to anticipate more aggressive action by the Fed. On Wednesday, the central bank did just that, breeding interest rates by three-quarters of a percentage point (the biggest increase since 1994) while warning of further hikes before the end of the year.

“Obviously, today’s 75 basis point increase is unusually large, and I don’t expect moves of this magnitude to be common,” Reserve Chairman Jerome Powell said. federal, according to a CNBC. report.

“We want to see progress. Inflation cannot come down until it stabilizes,” Powell said. “If we don’t see progress […] it could make us react. Soon we will see progress. »

Although inflation affects many countries, some legislators have critical the Biden administration for responding too slowly to inflation concerns. Treasury Secretary Janet Yellen, who like other senior administration officials predicted in 2021 that inflation would be “transient.” admitted recently that it was “then mistaken about the path inflation would take”.

The White House is “monitoring closely” the situation, White House press secretary Karine Jean-Pierre said the day after markets fell dramatically. “We know families are concerned about stock market inflation,” she told reporters aboard Air Force One. “It’s something we are aware of. But we know that’s, what we’re seeing right now, what we’re facing, are global challenges: Putin’s price hike, inflation, coming out of a global pandemic that won’t produced only once per generation.

“The American people are well positioned, we believe, to meet these challenges thanks to what the President has done over the past year and a half on the economy,” said Jean-Pierre, “an economic place historic that we are with more than 8 million jobs since President Biden took office.

Inflation has surged since Russia invaded Ukraine earlier this year, further disrupting supply chains that have been blocked since the start of the COVID-19 pandemic. As the West banned the import of Russian energy products in response, fuel prices soared to historic highs.

On average, bear markets have lasted about 15 months since 1966, according finance company Charles Schwab. “And they often end as abruptly as they started, with a quick rebound that is very hard to predict – an example of this is the pandemic fueled bear market in the S&P 500 at the start of 2020, which only lasted 33 days. from the previous high on February 19 to the low on March 23,” the firm wrote earlier this year. “That’s why long-term investors are generally better off staying the course and not pulling money of the market.”

Nonetheless, experts expect the next few months to be turbulent for US financial markets. “The markets have had a pretty good run over the past few years,” Reena Aggarwal, director of the Psaros Center for Financial Markets and Policy at Georgetown University, said in an email. “The combination of high valuations, the Ukraine-Russia conflict, supply chain issues and certainly inflation has made investors nervous. This market volatility will continue for some time.”

“People are feeling the impact of high prices for basic necessities and at the same time are seeing the value of their pension plans eroded,” she said. “This must lead to a slowdown in consumer spending and impact economic growth.”

For investors close to retirement or in retirement, Schwab says that “[r]regular rebalancing and proper diversification are important. The company also warns that those nearing or in retirement should avoid trading their stocks until the market improves.

“When you mine your portfolio as it declines in value, you have to sell more investments to raise a fixed amount of cash,” Schwab said. said. “Not only does this deplete your savings faster, but it also leaves you with fewer assets that can generate growth and returns in potential future upturns.”

The firm recommends keeping “a short-term reserve of low-risk, liquid investments that you can use to cover your expenses” and deferring big expenses as much as possible.

Sekera, a CFA, also said he expects “the stock market will continue to be particularly volatile over the summer.” He said the market is now grappling with the convergence of four major headwinds – “slowing economic growth rate”, “tightening monetary policy”, “runaway inflation” and “rising interest rates”, what Morningstar noted in its 2022 outlook earlier this year.

“In order to stabilize, I expect investors to wait for signs that inflation will begin to moderate and the US economy will stabilize without entering a recession,” Sekera said.

Despite the turmoil ahead, Sekera and other financial experts say the current market could present an opportunity for sophisticated investors who take advantage of discounted stock prices of strong companies.

“While we weren’t surprised by the sell off at the start of the year, we believe the pendulum has swung too far down and the stock market is now undervalued,” he said. .

“Recent market action looks like some portfolio managers are in a position where they’ve had to sell what they can instead of selling what they want,” he said. “This blind selling has led to a wide range of high-quality companies that are now selling at significant margins of safety below our intrinsic valuations.”

“Specifically, some of the best opportunities we see for investors today are among the companies to which we attribute a large economic divide – companies that have sustainable long-term competitive advantages and generally display the most pricing power. high,” he said.

Sekera said investors should “wisely increase equity exposure” now and act in accordance with their long-term plan, “which should encompass both their investment objectives and risk tolerance.”

Some possible areas to invest in, Sekera said, are in certain communications and technology companies, sectors where he sees “significant undervaluation.” Meanwhile, investors should probably steer clear of the energy sector, as it has “grew too much this year and is now overvalued.”

Ryan Payne, Chairman of Payne Capital Management, share similar advice with Yahoo! Finance Wednesday. “I think you’re buying with impunity here,” Payne said. “As a long-term investor, you buy when there is blood in the streets. There’s blood in the streets right now, and it’s kind of like nerd revenge.

Payne said “any of those old-school value names,” Verizon, Citibank or General Motors, for example, “are great to have in your portfolio right now.”

“If you look at a value stock portfolio, it’s down less than 10% this year,” Payne said. “The only bear market you see right now is in growth, disruptive technology, and bitcoin. But the reality is that if you take technology out of the S&P 500, you’re trading at 14 times forward earnings. It’s so cheap. It was as cheap as it has been in years. I think you have a godsend here as a long-term investor to buy.