Where is the Market Heading as Fed Announced Faster Tapering

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The final FOMC meeting of the year ended. In addition to the meeting outcome, we are keener on its impact on the market in the future. History and experience tell that indexes are expected to perform well during taper. Meantime, we hold that mega-cap tech stocks and value stocks are still sources for great returns. 

As for interest rate, the Federal Open Market Committee decided to keep the target range for the federal funds rate at 0 to 0.25 percent at this meeting. In terms of asset purchases, the Committee decided to reduce the monthly pace of its net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities. Beginning in January, the Committee will increase its holdings of Treasury securities by at least $40 billion per month and of agency mortgage‑backed securities by at least $20 billion per month. On economic projections, the Fed added the sentence that “Job gains have been solid in recent months, and the unemployment rate has declined substantially”, and removed the statement that “Inflation… largely reflecting factors that are expected to be transitory.”

The dot plot on policy rate projection suggests that all committee members see interest rate hikes in 2022, and 12 members see the case for at least three interest rate hikes by the end of next year. As for economic outlook, the Fed continued to lower its growth forecast in 2021, and increased its inflation forecast significantly. For the year 2021, it now predicts a 5.5% GDP growth, while the number was 5.9% in September, a 4.3% unemployment rate, while the number was 4.8% in September, and a 5.3% PCE index, which was 4.2% in September. 

The Fed has reached a preliminary consensus in general to curb inflation, taking no more chances. The above actions taken by the Fed are mainly to rebuild its reputation, rather than to depress economic expansion in essence. Moreover, the dot plot doesn’t represent the final policy decision on interest rate, as no one knows exactly what will happen in the future. If the inflation goes down in the next year, or economic performance falls short of expectations, the Fed could still turn to accommodative.   

Despite a hawkish turn of the Fed, the expectation had basically been priced into the market before the Fed meeting. The market actually reacted positively especially after Powell’s speech, pushing the three major indexes higher. This demonstrates that compared to a faster pullback of its stimulus measures which might raise concerns over hindered liquidity and growth, the market prefers the Fed’s policies turning to curb inflation, in particular, the short-term inflation expectations, for the latter will be a larger risk to the market in case of out of control. Therefore, the advantages outweigh the disadvantages in a sense. And a clear policy turn also benefits the market from anchoring expectations along more definite paths rather than pending policy expectations. 

Monetary policy alone can never be the core factor to reverse the US stocks trend completely, whether it is at the stage of tapering or interest rate hikes anticipation. After all, the US stocks have solid gains and are the major support of the market. Runaway inflation is a potential risk that will lead to faster-than-expected tightening of monetary policy, in which case, not only the market expectations need to be revised, the rapid rise in interest rates will also have a big impact on the market. All of these are actually dependent on the Omicron situation. If Omicron causes mild illness as it is now, it won’t be a game changer in complete reversal of the current trend of marginal improvements in global supply chains and price pressures since the Delta outbreak, although disturbances and stagnation are difficult to avoid.  

The history shows that before an actual interest rate hike, US stock indexes usually maintain an uptrend, and the developed markets outperform emerging markets. We believe that mega-cap tech stocks and value stocks still offer a better return on investment. 

Under the policy impacts, investors will face more challenging environment to understand the market. Stock Alpha is dedicated to make investment easier by leveraging its rigorous investment logic, analysis of massive data, and an advanced technology platform. With AI, big data, and other state-of-the-art technologies, Stock Alpha provides top-notch FinTech services around the globe based on data information through a series of products. Follow Stock Alpha for timely information on the US stock market, and make investment decision easier.   

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