Back at the start of this year, Marko Kolanovic and John Stoltzfus – the two most optimistic voices on Wall Street – were convinced of one thing: the Federal Reserve (Fed) would carry out its plan to raise interest rates but with very, very slow speed. Even if inflation is rising, it’s no big deal. And according to them, interest rates will rise so slowly that financial markets will barely feel it.
Kolanovic, head of research at JPMorgan Chase, forecasts that the market will continue to have another year of broad gains, with the S&P 500 index reaching 5,050 points by the end of 2022. Stoltzfus, Oppenheimer’s director of investment strategy, was even more upbeat, giving a 5,330-point figure.
In the end, the predictions were all wrong, more than 1,000 points different from what happened.
These two figures – two senior leaders at two big names on Wall Street – are a prime example of what has happened in the past year. With few exceptions, most experts in both the stock and bond markets could not have imagined that inflation would turn the investing world so drastically. The Fed acted too quickly, too hard, and sent both stocks and bonds to their worst year since the 1970s.
There are currently 865 mutual funds that actively invest in stocks and have assets of at least $1 billion. On average, they lost 19% in 2022. Equity hedge funds also lost heavily. In the bond market, 200 funds with assets of $1 billion or more also lost an average of 12%. Most perform much worse than benchmarks.
Unexpected shocks
To be fair, it is difficult for anyone to accurately predict how the market will turn out like this. A series of unexpected shocks to the global economy caused earthquakes in the markets. For example, no one thinks that China will stick to its Zero Covid policy until the end of the year or that Russia will carry out a special military operation in Ukraine.
According to Ken Leech, CIO of investment fund Western Asset Management, 2022 is a really challenging year. Recently, however, the performance of the Core Plus Bond Fund that Leech operates has begun to improve, with 3.6% growth in the fourth quarter. “We have adjusted our entire portfolio to changes in the macro environment and believe the fund is well positioned to benefit from the global economic recovery,” he said.
The Fed’s rate hikes were one of the biggest causes of the market’s plunge. For a long time, the market has believed that policymakers are always there and ready to rescue when the situation worsens, by scaling back plans to raise rates or even lower rates. Therefore, a falling market is a good time to catch the bottom.
This thinking was born right after the last time America faced inflation. By the mid-1980s, when prices had stabilized, the Fed could comfortably focus solely on its mission of supporting economic growth and jobs. In the process, they also inadvertently “inflated” both stocks and bonds.
But now that trust has been shattered in the current era of high inflation. Instead, the “Fed pivot” causes negative effects on the market. Investors used to expect that the Fed would have to stop raising interest rates, even lowering interest rates to prevent the US economy from falling into recession. But confidence was once again shattered when Fed Chairman Jerome Powell repeatedly affirmed that interest rates would continue to increase until inflation was completely under control.
The market is on fire because of the Fed
The Fed has made many mistakes. Throughout 2020 and 2021, Mr. Powell has remained confident that inflation is temporary. Prices rise because of bottlenecks in the supply chain and trillions of dollars are pumped in to stimulate growth, so inflation will soon cool down.
These comments reinforce investor confidence that the era of super low interest rates is still there. Last June, they were still betting that inflation would fall to around 3% over the next 12 months. That is, by the end of 2022, the Fed will only raise interest rates by about 0.4%.
That was a fatal mistake. In fact, inflation has reached 9%, and interest rates have increased by more than 4%.
Not only underestimated inflation, many in the private community still believe that the Fed will save everything. The irony is that professional investors on Wall Street once mocked the “ignorant” who were “burnt out” by frantically chasing GameStop stock or the Shiba Inu digital currency. But in the end, they are no different when the so-called elites of the financial world blindly believe that thanks to the Fed, the market only goes up, never down.
“If you’re rich and famous by the end of 2020, it’s because interest rates are super low. All your success comes from low interest rates, “said Andrew Beer, an expert from the Dynamic Beta ETF. Dynamic Beta is up 21% year-to-date on bets against bonds.
Therefore, Beer thinks it’s time for investors to rethink their approach. Rising interest rates and the way that investors are forced to lower their forecasts for future corporate profits are particularly negative for technology stocks.
There are some signs that Wall Street is changing, albeit slowly.
In early December, when many institutions published their forecasts for 2023, something that had not happened since at least 1999 appeared: many experts agreed with the view that the S&P 500 will have a declining year.
Among those who have downgraded their forecast for 2023 is Drew Pettit, a 33-year-old strategist at Citigroup. He is well aware that the “everything goes up” view is extremely dangerous. Once predicting the S&P 500 would end 2022 above 5,000 points, Pettit now puts it at 4,000 for 2023. “In the next year, there’s going to be a lot of ups and downs that we need to get through,” he said.
Refer to Bloomberg
Source: Vietnam Insider