The Fed decides how 2022 will be

The Fed decides how 2022 will be

19 January 2022 from Anna Svahn

The last two years have clearly shown that it is not the companies' profit estimates that govern the stock market. The only thing that seems to matter is how the Federal Reserve acts. The year has had a slow start for the stock market. The S&P 500 is down just under 3 percent, and the technology-heavy Nasdaq more than 5 percent.

When the Fed speaks, the market reacts. Powell has shifted from being dove-like to at least communicating to the market that austerity and interest rate hikes are coming. With the mountain of debt we have today, it will be difficult to go back to some kind of normalization of the interest rate, but with rising inflation there are few other options for the Fed.

Over a decade of money pressure is now visible in consumer prices.

Inflation in December amounted to 7 percent on an annual basis, at the same time the interest rate is close to zero and unemployment has looked back to levels close to before the pandemic. But despite the fact that the economy at least on paper seems to have recovered, with a global GDP growth of 5.5 percent in 2021 according to the World Bank, the biggest risk lies in whether the Federal Reserve will keep its promises of interest rate hikes in the future or not.

With a first rate hike expected to come in March at 25 basis points, the outlook for the stock market looks cool during the first two quarters of 2022. The mandate given to Congress by the Federal Reserve is to keep the currency and labor market stable, with a recovered labor market there is now room for the Fed to actually raise interest rates if they are to overcome inflation.

The Fed has been given a mandate by Congress to keep the currency and the labor market stable. Historically, however, this has meant that the Fed prioritized the labor market over fighting inflation, which explains why they printed so much money in 2021. However, it also means that if the coming interest rate increases would lead to negative effects on the labor market in the long run, the Fed would have to change feet and continue to stimulate the economy again - which in turn would be positive for the stock market.

The coming year can expected to be turbulent. So far, the markets have at least been shaken by promises from Powell, and should these be incorporated, the downside risk is great for highly valued tech companies. For well-known Cathie Woods and Ark Invest, the risks of investing in tech companies with as high multiples as hopes have been visible for almost a year. When Nasdaq rose almost 27 percent in 2021, Woods' flagship ETF fell 24 percent, and the start of 2022 has hardly been better, so far this year, Ark Innovation is down over 17 percent.

2022 may be the year when value-based investment models work again, but the question is how long, and whether the Federal Reserve really dares to let financial markets fall in an attempt to curb inflation.

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26/11/2022 09:59:04


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