Why Wall St’s Rally on the Latest Fed Rise Is Silly

The Australian Financial Review2022-07-28

ChanticleerJerome Powell set markets alight on Wednesday night by suggesting the pace of rate rises might slow. But one veteran fund manager worries the market is underestimating the task ahead of the...

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Comments

T202311701
2022-07-28
T202311701
Ooo
ccy1122
2022-07-28
ccy1122
[OK] [OK] [OK] [Like] [Like] [Like]
Ah Deck
2022-07-28
Ah Deck
Like pls
Rabbit63
2022-07-28
Rabbit63
Pls like
Gackky
2022-07-28
Gackky
why indeed
Huhu88
2022-07-28
Huhu88
Thanks

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But one veteran fund manager worries the market is underestimating the task ahead of the...</p>\n\n<a href=\"https://www.afr.com/chanticleer/why-wall-st-s-rally-on-the-latest-fed-rise-is-silly-20220728-p5b58j\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":".SPX","symbol_name":"S&P 500 Index","start_time":0,"source_url":"https://www.afr.com/chanticleer/why-wall-st-s-rally-on-the-latest-fed-rise-is-silly-20220728-p5b58j","article_id":"2254337399","we_media_id":null,"thumbnails":[],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2254337399","pubTimestamp":1658974049,"sourceInfo":{"source_id":"afr_stock","name":"The Australian Financial Review"},"weMediaInfo":null,"summary":"ChanticleerJerome Powell set markets alight on Wednesday night by suggesting the pace of rate rises ","collect":0,"end_time":0,"defaultTopTitle":"afr.com","property":[],"viewcount":null,"language":"en","relate_stocks":{".SPX":"S&P 500 Index","XAO.AU":"标普/澳交所 普通股指数","XJO.AU":"标普/澳交所 200指数",".DJI":"道琼斯","XKO.AU":"标普/澳交所 300指数",".IXIC":"NASDAQ Composite"},"translate_title":"为什么华尔街在最近美联储加息时的反弹是愚蠢的","themeId":"","isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{".DJI":0.9,".IXIC":0.9,".SPX":0.9,"XAO.AU":0.9,"XJO.AU":0.9,"XKO.AU":0.9},"content_text":"ChanticleerJerome Powell set markets alight on Wednesday night by suggesting the pace of rate rises might slow. But one veteran fund manager worries the market is underestimating the task ahead of the Fed.Another big Federal Reserve rate rise, another bizarre Wall Street rally.Federal Reserve chairman Jerome Powell once again tripped himself up in his press conference to discuss the 0.75 per cent rate hike announced on Wednesday night.After declaring in his written statement that the Fed was committed to bringing inflation back towards the bank’s 2 per cent target, even amid signs of softening in the US economy, Powell let slip in his press conference that it might “likely become appropriate to slow the pace of increases” later in the year.US Federal Reserve chairman Jerome Powell’s suggestion the pace of rate rises could slow set the market alight.  David RoweAnd with that, Wall Street was off to the races: the S&P 500 Index surged 2.6 per cent and the Nasdaq jumped 4.1 per cent, its best day in over two years.Imagine if the Fed had lifted rates by 1 per cent!There’s nothing new in this post-rate hike exuberance, of course. The S&P 500 has rallied more than 1.4 per cent on every day the Fed has lifted rates this year – and then promptly given that rally back, and generally more, over the following weeks and months.There are several reasons that a rally of the magnitude we saw on Wednesday night is silly, the first being that rising markets mean looser financial conditions – and that’s exactly what the inflation-fighting Fed doesn’t want.The S&P 500 is now up almost 10 per cent since the middle of June as investors and traders bet that by front-loading rate hikes, the Fed is getting closer to cutting rates as the US economy weakens.Sameer Samana, senior global markets strategist at Wells Fargo Investment Institute, says investors who are betting on this rally continuing should be careful.“The risk/reward from current levels is pretty poor since a further rally in risk and easing of financial conditions will push the Fed toward even larger hikes.”The bigger reason this rally is risky is because it underestimates what the Fed might need to do to calm inflation in the US, which sits at a four-decade high of 9.1 per cent.Mark Holowesko, the Bahamas-based fund manager who runs Holowesko Partners, showed a fascinating chart to investors during this visit to Australia this week, which showed the Fed’s interest rate and CPI at the end of the past eight tightening cycles.His point was simple: “I don’t think most people realise that interest rates, reflected by the Fed Funds rate, historically have to get above the rate of inflation in order to control it.”The Fed’s interest rate now stands at 2.25 per cent to 2.5 per cent, while inflation sits at 9.1 per cent.Holowesko believes inflation will prove stickier than the market believes, pointing out 68 per cent of the items that make up US inflation are still inflating. And while he concedes that the US economy’s debt load – up from $US6 trillion in 2008 to $US28 trillion today – will exaggerate the impact of rate hikes, he’s not buying the market’s conviction that the Fed will soon be cutting.“My view is that the 10-year Treasury rate should be around 6 per cent or 7 per cent at a minimum, and that assumes that inflation can come back down to four or 5 per cent. If you look at the Fed Funds futures curve, the expectation is that that funds rate gets to 3 per cent in March of 2023, that’s it, and then it falls. That’s crazy. That means that inflation has got to come down from 9 per cent to 3 or 4 per cent in the next six months. How’s that going to happen?”Holowesko, whose flagship long/short fund up 4 per cent year to date, versus a 20 per cent decline in world markets, sees only a mild recession coming in the US because consumers are in great shape, particularly the wealthiest 20 per cent who account for 40 per cent of spending.But he questions whether equity markets have really priced in the impact of rate hikes.“I come back to the fundamental elements that drive a return. It’s the starting valuation and the end valuation, interest rates, profit margins and GDP growth. If your starting valuations are high, and your profit margins are under pressure, and interest rates are rising, it’s very difficult in that kind of environment to get proper returns.”The US market might look cheaper at 17 times forward earnings, but Holowesko says that multiple doesn’t yet take into account the earnings hit from higher interest rates and slower economic growth. He believes US markets could still have another 20 per cent to 30 per cent to fall as rates rise.“From my perspective I believe we are about a third of the way through this unwinding in the US. We haven’t seen the speculative excesses completely removed.”Holowesko also sees the potential for a Fed mistake of the 1970s to be repeated. He says the Fed raised rates to fight inflation, only to cut them again amid early signs of economic weakness.Inflation eventually got out of control and was not slayed until Paul Volcker was appointed chairman and delivered 7.75 per cent worth of tightening.“I feel that may happen again. The Fed might panic and not increase rates enough. 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