What You Need to Know
- Strategists from BofA, Goldman Sachs and JPMorgan Private Bank weigh in on the current market rout.
- Expected Fed interest rate hikes, which begin as early as March, are weighing on the market.
- Stock and bond investors will be focusing on the Fed's policymaking meeting Wednesday for more direction.
The S&P 500 slipped into a correction Monday morning, down slightly more than 10% from its early January high, joining Nasdaq, which was off 15% while the VIX — the volatility index — neared its highest level in a year.
Traders and analysts cited this week’s upcoming Federal Reserve policymaking meeting, after which the central bank is expected to indicate that it will begin raising rates in March for the first time in more than three years.
The Fed is expected to hike four times and start reducing its bloated balance sheet this year.
Mohamed El-Erian, the president of Queens’ College, the University of Cambridge, and chief economic advisor at Allianz, wrote in a Financial Times column, that the Fed needs to “send a clear message that it is serious in addressing inflationary pressures” by immediately ending its asset purchases and start hiking rates in March along with announcing plans to begin shrinking its balance sheet.
“Officials must also come clean on why they so badly misread inflation for so long,” El-Erian wrote.
Strategists differ on whether such a clear reversal of easy monetary policy will crash the market, but three teams from big banks recommended recently that investors look to high-quality stocks.
Bank of America strategists led by Chief Investment Strategist Michael Hartnett expect negative returns in the U.S. stock market this year due to “rates shock” in the first half of the year and “recession panic” in the second.
The “Fed is hiking into overvalued credit and equity markets and Fed tightening always ‘breaks something,’ “ writes Hartnett in a recent market note. He doesn’t say how far he expects stocks will fall.