Source: Zhitong Finance
Once the Fed signals an end to tightening, stocks will bottom, Goldman Sachs said; however, the end of tightening may not come until a recession is evident.
Goldman Sachs strategist Vickie Chang wrote in a note: “It may be necessary for the market to become more confident than it is now that financial conditions have tightened enough and that the Fed has implemented and sent enough hawkish signals. Historically, Monetary policy stopped tightening about 3 months before the stock market bottomed and turned to easing about 2 months after the stock market bottomed.”
U.S. stocks have fallen sharply this year as investors worry that aggressive monetary tightening by the Federal Reserve will tip the U.S. economy into recession amid soaring inflation. The S&P 500 was on the verge of entering a bear market on Friday, while the Nasdaq 100 fell more than 25% in 2022 as concerns that higher interest rates would dampen future earnings growth and hit valuations, tech stocks emerged Bubble, sparking a sell-off.
“Without a clear U.S. recession, the Fed is unlikely to turn to easing, but perhaps as in late 2018, a clear signal that hawkish risks are receding would suffice,” Chang said.
Earlier this month, the Fed raised rates by 50 basis points to a target range of 0.75%-1%. Fed Chairman Jerome Powell has hinted that the central bank will raise interest rates on a similar scale at its June and July meetings.
The minutes of the Fed’s policy meeting due on Thursday will be the focus of investors’ attention to gain insight into the Fed’s tightening path. Kansas City Fed President Esther George said the central bank is expected to raise interest rates to 2% by August, and further policy measures will depend on how much soaring inflation cools.
In the past, such stock market corrections triggered by monetary tightening have tended to bottom out when the Fed turns to easing, regardless of whether economic activity has bottomed out , as investors bet that rate cuts would boost activity anyway, Goldman Sachs said. However, Chang said stock market investors are unlikely to get a clear signal of a policy shift from the Fed this time around unless there is solid evidence that economic growth is slowing and prices are cooling.
Chang pointed out: “Looking at history, in order to get stocks off their recent lows (and stop falling), this monetary tightening-induced contraction is most likely to end when the Fed changes policy.” Markets may need to see signs of deceleration in inflation before they can see continued monetary policy easing; Goldman Sachs U.S. economists expect inflation to moderate in the second half of the year. “
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