S&P 500 falls 2% on back of Fed Minutes
The S&P 500 fell 2% yesterday immediately after the Federal Reserve released minutes of their December meeting. The minutes from the December policy meeting showed Fed officials concerned about inflation and global supply bottlenecks well into 2022.
Fed officials see the Omicron variant of the coronavirus as adding further to inflation pressures but not fundamentally altering the path of economic recovery in the United States.
Fed Officials generally noted that it may become warranted to increase the federal funds rate sooner or at a faster pace than anticipated. The market already new this after the Fed announcement in December.
The minutes indicate that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate. This is a new development.
Why is this negative for the stock market? there are a couple of reasons why this is overall negative for stocks:
- Borrowing costs are set to rise at a time when costs of goods and services will also rise. This will have a negative impact on profit margins.
- Bond yields will most likely rise in this environment making the ‘risk free’ asset more attractive to investors.
- Broadly speaking stocks are at record valuation levels. It is likely that stocks will retreat to more reasonable valuations.
Where to Invest in the stock market?
There are some reasons to be positive on stocks throughout 2022:
- Earnings growth is still forecasted to be in the region of 5%.
- any positive news on Covid 19 will lead to rallies in recovery stocks… hospitality etc….
- positive news that inflation risks are easing will lead to a broad based rally in stocks especially technology stocks
You can expect a more volatile 2022. Indices could drop 10% or more broadly speaking. But there are stocks that are offering great value. For now, invest in value stocks and steer clear of companies that lose money. Visit our stock investor club to see our value stocks for 2022.
Consider protective option strategies in your portfolio throughout the first half of the year.
Happy Investing
Stephen