The Era of Inflation is Over — for Asset Prices on Wall Street

The Era of Inflation is Over — for Asset Prices on Wall Street

(Bloomberg) — As the Federal Reserve’s relentless fight against inflation engulfs every asset on Wall Street, investors are asking: Why buy now when things could get even cheaper?

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What started as a light stock sell-off this month has turned into normal rising interest rate activity that has wiped out nearly all of the summer gains in the S&P 500. Corporate debt yields haven’t been enough to entice buyers. attraction as investors park their money in more cash, waiting for more pain in the economy that suffers from central banks — and a better buying opportunity. At the same time, the debt debacle of Citrix Systems Inc. highlighted the tougher capital-raising climate for Corporate America, which darkened the outlook for indebted companies in the stock market.

All of this comes at a bad time for companies facing shrinking profit margins. Stock valuations, though below multi-year highs, may fall after the S&P 500 doubled from the bottom of the pandemic. And even with nominal Treasury yields at their highest levels in more than a decade, inflation-adjusted rates have scope to climb even higher.

Jerome Powell and his Fed colleagues will not be upset by the sharp drop in asset prices. They have spent the last six months, first subtly and then directly, saying that inflation cannot come down until the excesses in the financial markets ease. Since the central bank began tightening in March, 10-year yields have risen more than 1.5 percentage points, stocks have fallen 20% and junk bond spreads have widened by about 90 basis points. There will probably be more pain.

“The message from the Fed is that ‘We are going to keep hiking until something goes wrong,'” said George Pearkes, Global Macro Investment Strategist. “The fact that nothing is broken tells us that we are not done. If the Fed is in that mindset, how are the markets supposed to suffer?”

With the S&P 500 falling for a third straight day on Thursday, following its worst Fed-day performance since January 2021, it appears that investors are finally heeding the central bank’s message: After the era of peak stimulus monetary, asset price deflation is needed. a byproduct of cooling price pressures in the wider economy.

Minneapolis Fed President Neel Kashkari said in late August, saying he was “happy” to see the market rumble in response to Powell’s speech from Jackson Hole, where Chairman Jerome Powell hinted that the central bank was committed eliminate your inflation.

Powell repeatedly referred to the labor market at a press conference on Wednesday, noting that its strength remains “out of balance” as policymakers try to get a grip on the hottest inflation in a generation.

After a straight three-month streak of outflows was broken in August, more than $5 billion has been drained from US equity exchange-traded funds, Bloomberg data show. Meanwhile, the more speculative corners of the market are being punished. Goldman Sachs’ basket of unprofitable technology companies has fallen 12% so far in September, on track for its worst monthly performance since May.

“If sellers are more aggressive and buyers less aggressive, that supply-demand imbalance will cause some deflation in equity prices,” Art Hogan, chief market strategist at B. Riley, said in a phone call. “And to the extent that that’s what we’re going through now, it’s like the demand is being reduced for other things.”

Likewise, while prices continue to decline across asset classes, there are no major signs of investor panic such as forced liquidations or systemic stress. Financial conditions – a cross-asset measure of market stress – are closer to the levels they were at before the Fed’s March hike. Although credit issuance has slowed, investment-grade companies are still able to capture more or less deals, albeit at a price.

Against that background, it makes sense to hold off and wait for more negotiations with the Fed on a warpath, according to Kim Forrest at Bokeh Capital Partners.

“The Fed has laid out this strategy to kill inflation and it looks like it will also kill the economy. And that’s why we’re having a buyers’ strike,” Forrest, the firm’s founder and chief investment officer, said in an interview. “All I’ve been doing this morning is sitting there looking at the things I want to buy and my big question is: are they going to be cheaper next month? And the answer is maybe. Maybe.”

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