Fed may trigger ‘bigger corrections’ in stock market with its actions: strategist
Investors should buckle up as it could get hairy this year with the Federal Reserve poised to begin lifting interest rates from rock bottom levels.
“I definitely think we will experience more volatility in 2022 than what we have seen certainly over the last year, but even going back over the last decade. We started to see in 2021 volatility creep up, and I think we will see volatility creep up even further in 2022,” said Pimco portfolio manager Erin Browne on Yahoo Finance Live.
Historically speaking, stocks have had a mixed track record amid rate hiking cycles out of the Fed.
The S&P 500 has dropped 6% on average during the three months following the first rate increase of recent cycles, per new research out of Goldman Sachs chief U.S. equity strategist David Kostin. Weakness in stocks has proven short-lived, but gains have been far less juicier than investors nowadays have come to expect.
Kostin notes the S&P 500 has returned 5% in the six months following the first rate hike of a cycle.
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“As we reach these sort of transition points in the market — and the big transition is going to be the Fed starting to hike rates — that typically means you are going to have bigger corrections,” Browne explained. “I think we will have bigger corrections along the way.”
Browne is bullish on semiconductors as the industry continues to flourish financially due to the pandemic-fueled chip shortage.
To Browne’s point, markets are already beginning to act funky — notably in sectors where valuations are lofty (see tech stocks).
The Nasdaq Composite finished Tuesday’s session with a drop of 2.6%, bringing it to its lowest level since October. On Wednesday, the Nasdaq hit correction territory — marked as a 10% decline from a recent high.
All five components of the high-growth, widely owned FAANG complex (Facebook/Meta, Apple, Amazon, Netflix and Google) have shed more than 4% year-to-date, according to Yahoo Finance Plus data. Losses in the FAANG sector have been paced by a 14% drop in Netflix ahead of its earnings on Wednesday evening.
“No market moves in a straight line. Given the important and significant change in Fed policy that has begun to be implemented and given that the stock market is extremely expensive, we believe that a deep correction in the stock market is quite likely over the coming weeks and months. However, there is little question that we’ll see many short-term relief rallies along the way,” warned Matt Maley, Miller Tabak chief markets strategist.
Yahoo Finance’s Emily McCormick contributed to this story.