AMERIPRISE FINANCIAL, INC. 
The Federal Reserve did not take the punch bowl away on Wednesday, but it did remind everyone at the party that there is a closing time. And it is likely to be sooner than expected. The Fed brought forward its previous view that the first rate hike in the expected eventual tightening cycle would come in 2024. It has now indicated that it may come in 2023, and there may be more than one quarter point rate hike before the end of 2023. That message was followed up on Friday by St. Louis Fed president Bullard, who said somewhat ominously that the Fed has been surprised at the severity of rising inflationary pressures, although the Federal Open Market Committee (FOMC) re-asserted its view that such pressures are transitory, and that the first rate hike could come as soon as late 2022.
The hawkish turn at the Fed resulted in some immediate shifts in market positioning. Most notable was the flattening of the yield curve, as longer-term inflation expectations fell. By week's end the yield on the two-year Treasury note had climbed from 0.16 to 0.25 percent, and the ten-year slipped to 1.44. The yield on the thirty-year bond declined from 2.21 at mid-week to 2.02 percent. Inflation breakeven rates fell by similar amounts, with the ten-year falling from 2.39 to 2.24 percent, and the five-year falling from 2.49 to 2.38 percent. High yield spreads widened slightly; BBB spreads were unchanged.
The dollar was an immediate beneficiary of the change in tone at the Fed. The DXY index surged higher, climbing almost 2 percent by week's end. The 2.2 percent rise against the euro was even more notable, reflecting the divergent paths between the dovish ECB and the Fed. Over the course of Thursday and Friday after the Fed meeting, the EuroStoxx 50 equity index fell 1.6 percent in euro terms, 3.6 percent in dollars.
The S&P 500® Closed Below its 50-Day Moving Average; Investors Speculate the Fed Will End Its Bond Buying Program
Stocks took note as well. The S&P 500 fell 1.9 percent on the week, closing just below its 50-day moving average. It was the economically sensitive groups, the so-called reflation trade, that bore the brunt of the retreat. Over the course of the final three days of the week the energy sector fell 6.8 percent, financials fell 5.4 percent, and materials fell 4.9 percent. And although no sector was positive, the best performer was consumer discretionary, which declined just 0.1 percent, followed by technology at -0.3 percent, and healthcare at -0.8 percent. The Russell 1000 Value index fell 3.5 percent, while its growth counterpart actually rose by 0.2 percent. The small cap Russell 2000 fell 3.5 percent.
The Fed left in place its bond buying program until there is substantial further progress toward its dual mandate of full employment and average inflation over time at 2 percent. But, bringing forward the expected timing of the first rate hike also likely brings forward the timing of an announcement regarding the tapering of its bond buying. The Jackson Hole symposium in late August and the subsequent FOMC meeting in mid-September are increasingly likely forums for such an announcement.
A Correction in Equities May be Overdue; The Fed Prepares to Unwind Its Extraordinary Support
The prospect of a less accommodative monetary policy arriving sooner than expected raises the question of how much of an adjustment equity markets are likely to make. It remains to be seen if last week's selling pressure gathers momentum, but the possibility that stock prices already reflect peak economic and earnings growth may lead to more widespread profit taking in the days ahead. We could also see some general de-risking, as investors rotate away from more aggressive positions, even while maintaining overall equity exposure. Some may decide this is an opportune time to rebalance portfolios whose risk profiles have become extended after the fifteen-month uninterrupted surge in equity prices.
Stocks have not experienced a correction since the recovery began last March and are arguably overdue. Valuations have risen to historically high levels, justified in part by rock bottom interest rates. But the prospect of higher rates raises the question of whether such valuations are still justified. It is worth remembering, however, that both the economy and corporate earnings are strong, and likely to remain so next year. A first rate hike in 2023 is at least eighteen months away, or longer. Even a rate hike in late 2022 is at least twelve months away. In the meantime, policy remains exceedingly accommodative, and will remain so for a while after the tightening cycle begins. Fiscal policy will also remain supportive, as an infrastructure bill is likely to emerge sometime in the weeks ahead.
The Fed will tread lightly from here. The last thing it wants to do is spook markets into more severe selling pressure. But the Fed also recognizes that the economic recovery is strengthening and it's time to prepare for the unwinding of some of its extraordinary policy support, with an extended lead time. And that is something investors should welcome.
Important Disclosures:
Sources: Factset, Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources. This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.
Investing involves risk including the risk of loss of principal.
The Federal Open Market Committee (FOMC) consists of twelve members--the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.
The 10 Year Treasury Rate is the yield received for investing in a US government issued treasury security that has a maturity of 10 years. The two year treasury note has 2 year maturity.
There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities.
The U.S. Dollar Index (DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains 'strength' (value) when compared to other currencies.
Investments in a narrowly focused sector may exhibit higher volatility than investments with broader objectives. An investment in sectors are subject to market risk and economic risk.
Past performance is not a guarantee of future results.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
Definitions of individual indices and sectors mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section, or through your Ameriprise financial advisor.
Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.
The hawkish turn at the Fed resulted in some immediate shifts in market positioning. Most notable was the flattening of the yield curve, as longer-term inflation expectations fell. By week's end the yield on the two-year Treasury note had climbed from 0.16 to 0.25 percent, and the ten-year slipped to 1.44. The yield on the thirty-year bond declined from 2.21 at mid-week to 2.02 percent. Inflation breakeven rates fell by similar amounts, with the ten-year falling from 2.39 to 2.24 percent, and the five-year falling from 2.49 to 2.38 percent. High yield spreads widened slightly; BBB spreads were unchanged.
The dollar was an immediate beneficiary of the change in tone at the Fed. The DXY index surged higher, climbing almost 2 percent by week's end. The 2.2 percent rise against the euro was even more notable, reflecting the divergent paths between the dovish ECB and the Fed. Over the course of Thursday and Friday after the Fed meeting, the EuroStoxx 50 equity index fell 1.6 percent in euro terms, 3.6 percent in dollars.
The S&P 500® Closed Below its 50-Day Moving Average; Investors Speculate the Fed Will End Its Bond Buying Program
Stocks took note as well. The S&P 500 fell 1.9 percent on the week, closing just below its 50-day moving average. It was the economically sensitive groups, the so-called reflation trade, that bore the brunt of the retreat. Over the course of the final three days of the week the energy sector fell 6.8 percent, financials fell 5.4 percent, and materials fell 4.9 percent. And although no sector was positive, the best performer was consumer discretionary, which declined just 0.1 percent, followed by technology at -0.3 percent, and healthcare at -0.8 percent. The Russell 1000 Value index fell 3.5 percent, while its growth counterpart actually rose by 0.2 percent. The small cap Russell 2000 fell 3.5 percent.
The Fed left in place its bond buying program until there is substantial further progress toward its dual mandate of full employment and average inflation over time at 2 percent. But, bringing forward the expected timing of the first rate hike also likely brings forward the timing of an announcement regarding the tapering of its bond buying. The Jackson Hole symposium in late August and the subsequent FOMC meeting in mid-September are increasingly likely forums for such an announcement.
A Correction in Equities May be Overdue; The Fed Prepares to Unwind Its Extraordinary Support
The prospect of a less accommodative monetary policy arriving sooner than expected raises the question of how much of an adjustment equity markets are likely to make. It remains to be seen if last week's selling pressure gathers momentum, but the possibility that stock prices already reflect peak economic and earnings growth may lead to more widespread profit taking in the days ahead. We could also see some general de-risking, as investors rotate away from more aggressive positions, even while maintaining overall equity exposure. Some may decide this is an opportune time to rebalance portfolios whose risk profiles have become extended after the fifteen-month uninterrupted surge in equity prices.
Stocks have not experienced a correction since the recovery began last March and are arguably overdue. Valuations have risen to historically high levels, justified in part by rock bottom interest rates. But the prospect of higher rates raises the question of whether such valuations are still justified. It is worth remembering, however, that both the economy and corporate earnings are strong, and likely to remain so next year. A first rate hike in 2023 is at least eighteen months away, or longer. Even a rate hike in late 2022 is at least twelve months away. In the meantime, policy remains exceedingly accommodative, and will remain so for a while after the tightening cycle begins. Fiscal policy will also remain supportive, as an infrastructure bill is likely to emerge sometime in the weeks ahead.
The Fed will tread lightly from here. The last thing it wants to do is spook markets into more severe selling pressure. But the Fed also recognizes that the economic recovery is strengthening and it's time to prepare for the unwinding of some of its extraordinary policy support, with an extended lead time. And that is something investors should welcome.
Important Disclosures:
Sources: Factset, Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources. This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.
Investing involves risk including the risk of loss of principal.
The Federal Open Market Committee (FOMC) consists of twelve members--the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.
The 10 Year Treasury Rate is the yield received for investing in a US government issued treasury security that has a maturity of 10 years. The two year treasury note has 2 year maturity.
There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities.
The U.S. Dollar Index (DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains 'strength' (value) when compared to other currencies.
Investments in a narrowly focused sector may exhibit higher volatility than investments with broader objectives. An investment in sectors are subject to market risk and economic risk.
Past performance is not a guarantee of future results.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
Definitions of individual indices and sectors mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section, or through your Ameriprise financial advisor.
Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.
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Ameriprise Financial Inc. published this content on 22 June 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 22 June 2021 14:04:03 UTC.
