Written by: George Prior
Stock markets could experience a rally this week as investors look for clues on the US Federal Reserve’s policy path on interest rates, but caution is still required, affirms the CEO and founder of deVere Group, one of the world’s largest independent financial advisory, asset management and fintech organizations.
Nigel Green’s bullish comments come ahead of the release of the minutes of the FOMC (Federal Open Market Committee) - the branch of the US central bank responsible for implementing monetary policy – meeting held in May.
He notes: “Investors around the world will be delving into the minutes of the meeting to look for hints about whether the world’s most influential central bank will hike interest rates for the 11th consecutive time in June.
“Despite inflation remaining high, and continuing tightness in the labor market, there’s a growing sense that the Fed is now likely to pause its rate-hiking agenda next month.
“Much of this optimism is down to Federal Reserve Chair Jerome Powell saying Friday that stresses in the banking sector could mean that interest rates won’t have to be as high to control inflation.
“If this consensus gains momentum on the back of the FOMC minutes on Wednesday, markets will rally as it will appear that the end of rate hikes is getting closer and closer.
“However, should this happen, investors must remember this would not yet be a pivot, it would remain a hawkish pause.”
A rally, though, is “going to be tempered somewhat by worries about delays to finding a deal on the US debt ceiling crisis, which looks like it’s going to go down to the wire,” says Nigel Green.
Last week, the deVere boss in a media note warned of the need to avoid complacency.
“While stock markets are enjoying a wave of buoyancy, with investors appearing to be looking beyond the current interest rate cycle and ahead to the next upswing in the economic cycle, core major bond markets continue to be marked by inverted yield curves, which suggest a recession is looming.
“The inverted yield curve indicates a recession is ahead because it’s a sign of a tight credit market and weak economic growth. The inversion has preceded most US recessions – which, of course, have a huge drag on the global economy - since 1950.
“With this disconnect between stocks and bonds, investors should brace themselves for significant volatility in global financial markets over the next few weeks. We could see a 10% correction.”
Nigel Green stresses that this heightened volatility underscores the need for professional advice. “Volatility always brings opportunity for investors as it creates definite winners and losers. Those who are serious about using the market turbulence to build and grow their wealth for the long term should work with an adviser to identify the winners and to rebalance their portfolios accordingly.”
A potential Federal Reserve pause of rate hikes this week will have a positive impact on US stock markets, which will then likely boost global indexes for four primary reasons.
First, the slowdown in the increase of borrowing costs for businesses and individuals. Stable borrowing costs stimulate economic growth, increase consumer spending, and boost corporate profitability. As a result, companies’ earnings typically improve, which generally has a positive effect on stock prices.
Second, a boost to investor confidence. Investors will perceive a pause in rate hikes as a sign that the economy is on a more stable path which, in turn, will lead to increased demand for stocks, driving up stock prices.
Third, the capital draw. Stable interest rates may encourage investors to seek higher returns in other investment options, such as stocks. This increased demand for stocks can push prices higher.
The deVere CEO concludes: “If the Fed minutes suggest a pause next month of rate rises, markets are likely to rally, but I would urge investors to remain vigilant to other issues that might impact a sustained upward movement at this time.”