On Wednesday, the U.S. central bank announced a new 25 basis point increase in the federal funds rate.
The result was a generalized retreat of the main financial indexes in the North American country.
A pause in the rate hike policy is expected to be announced for the next meeting in mid-June.
This hypothetical pause should not be taken as an opportunity to buy stocks in anticipation of a rally, according to Hartnett.
A few hours ago, it was reported that the U.S. unemployment rate fell by one tenth of a percent to 3.4% in April. Among the readings that can be given to this, inflation and the central bank’s actions stand out. The outcome for many investors could be negative if they place capital hoping that a pause by the Fed will trigger a rally in stocks.
The latter is argued by a group of BofA analysts led by Michael Hartnett. Following last Wednesday’s (May 3) rate hike, the Fed left open the possibility of a timeout. Speculation centers on the fact that the recent rate hike could be the last of the cycle. Thus, the only thing left to do now is to wait for the cuts, which would happen sometime in 2024.
Many analysts expect this slowdown to trigger a new equity rally. This would have a similar effect to the 75 to 25 basis point slowdown in recent meetings. Thanks to this slowdown, stock markets experienced a strong rally in the first part of 2023.
But Harnett believes that won’t necessarily be the case with the potential June pause. In a note to clients, quoted in Bloomberg, the expert warned about the negative consequences of sticking to that scenario.
What to expect from the Fed pause?
After this week’s 25 basis point hike, the Fed is expected to implement an observational pause in its monetary policies. This leaves the federal funds rate in the 5%-5.25% range, the highest since 2008. The U.S. central bank left open the possibility for such a pause during the mid-June FOMC meeting.
Fed Chairman Jerome Powell clarified that additional hikes could be implemented depending on the data along the way. Despite this, the vast majority of investors expect no further increases in the price of money. In any case, the BofA analyst believes that under any scenario an entry point is not advisable.
In his view, fears of recession and persistently high inflation become a negative signal for financial development. For Harnett, who got it right with his prediction of an exodus of stocks in 2022, reaching a bull market requires an open policy of easing by the central bank and a simple pause is not enough .
Consequently, getting to a bull market requires first going through a recession that brings inflation to the 2% target. Under current conditions one cannot expect to jump a few halts to get into profit territory. Now the Fed has its sights set on bending the labor market, which added 253,000 new payrolls in April.
With such an employment outlook, the Fed’s possible pause is put on hold, making the analyst’s words all the more powerful. Thus, price pressures and the strength of the employment sector prevent the central bank from contemplating lifting its foot off the accelerator .
Stocks on the decline so far in May
During the first week of May, stocks lost significant ground after several shocks. The tails of the crisis in the banking sector, which took First Republic recently, were the first cause of uncertainty. Added to this were the prospects of more resilient inflation, a slowdown in economic growth and a prolonged duration of high rates.
Strategists point to weakening corporate earnings despite the strong results expressed in the first quarter earnings season. So far, 2023 is viewed positively compared to last year. The green numbers in the first quarter generate a positive feeling among investors, but Harnett believes that those months may have been just a small oasis.
Thus, “the big story of 2023” remains the recession that would damage hopes for a favorable situation in credit, technology stocks and the homebuilding sector. On the other hand, it would generate great opportunities in hard landing assets. These include oil, banks and small market cap companies.
Amid this backdrop, waiting for the Fed to take a pause to make inflows into some stocks does not seem like the best recommendation. The magnitude of the fed funds rate looks like it will eventually fracture the labor market sooner or later. However, if that effect takes too long, the banking crisis could deepen and lead to further losses among regional lenders.
Inside the Fed, officials expect the lender crisis to pave the way for recession. Since its shakeout in early March, it resurfaced with the collapse of First Republic. According to JPMorgan, with the purchase of that bank the problem would have come to an end, but not everyone agrees with that view.
It is more profitable to buy Bitcoin?
Although it may seem like a bad recommendation, now investing in Bitcoin could be a form of value safeguard for investors. Historically, this digital asset is regarded with horror due to its strong volatility, but now it seems to have a different nature. During the first part of the banking crisis, the cryptocurrency experienced strong growth.
With fears once again running high, BTC marks a growth path again towards $30,000 per coin. In 2022, the pioneering digital currency performed correlated with risk assets. Now, however, its face is closer to that of a reserve asset, as its adherents insist.
The new jump in Bitcoin’s price comes as a reaction to both the banking situation and the recent rate hike. It is important to take into consideration that the $30,000 barrier remains a serious challenge to the recovery hopes of that digital currency. At the current moment, the price of Bitcoin is more than 50% below its late 2021 peak.
The destruction of regional bank depositor confidence is driving large sums to large banks and cryptocurrencies. Both commercial real estate lending and various banking institutions would experience more problems going forward, Tommy Honan of the Swyftx exchange tells Bloomberg.
With that, it’s safe to say that the Fed’s possible pause in monetary policy would present alternatives for investors. While they may not be able to invest in stocks, they could invest in digital currencies. One should not lose sight of the fact that these assets are highly risky and placing capital in them can lead to total losses.
There are several ways to gain exposure to Bitcoin in a safer way. In this paper, we present the shares of a mining company that have a potential upside of almost 200% for the next 12 months.
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