Vasu, what have you been telling clients this morning about how to trade the FOMC
meeting? Well, that's a tough one to solve
because, you know, the jury's still out. Our view is that they're gonna hike by
75 basis points this week and probably another 25 basis points in December
before the dial down slightly and hit. What's the 5 percent annual rate?
So with the inflation rate still running at a fairly high level, I mean, the P.C.
numbers are copy C numbers, which came out last week.
We saw it running at 5.1 percent, slightly below market expectations.
But, you know, quite significantly above the previous month, just four point nine
percent. So inflation is still a problem.
So I don't see how the Fed and, you know, dial down in any big rate just
yet. I mean, unemployment is still very low.
Job market is very tight. And for them to do anything too
dramatic, just a few days before the jobs to this Friday, which may surprise
the markets on the upside, I mean, me would be very risky for the Fed to give
it in a big way at this juncture. So so I'll guess is that probably the 25
basis point hikes in November, December? But for the folks at Goldman Sachs, put
out a note that they're saying they're expecting the Fed to hike more than
previously anticipated. They're seeing the rates going up to 5
percent by March. The market's lifetime is kind of jumping
on this note and asking a broader question have risk assets priced for 5
percent Fed rates? Well, you know, I think not fully, not
fully. I mean, I think the markets have to some
extent pricing inflation to some extent priced in the 5 percent rate hike.
But the consequence of that 5 percent rate that we're talking about here is
that perhaps even more so is that the economy could slip into recession.
I don't think a recession is really pricing because I was just looking at
the blue. But, you know, analysts forecasts for
global equities in terms of earnings and you still see optimism.
You've not seen analysts downgraded earnings in any meaningful way.
There's still a lot of optimism. And I think you need to see some kind of
a downgrade, some morning, more meaningful downgrades before you can be
confident that, you know, 5 percent rate hike or rather 5 percent rate with a
recession had been priced in. I think a recession has not been fully
priced in. And that's what worries me.
I'm looking at the China data that we got in terms of the PMI, an economy that
continues to weaken the signs are that they're going to be more strains ahead.
How contingent is a year end rally on a China that reopens up on a China that is
able to generate economic momentum again for the world?
Well, you know, I don't think it's gonna make that much of a difference.
The Fed is still the main game in the markets, you know.
I mean, given the markets, the Chinese economy has not done well.
The macro picture in China has been very negative for the last the, you know, 18
months, 20 months since February of last year.
I mean, the MSCI China index is down more than 60 percent since 17 2021.
We've had a slew of bad news and still global equities have done well.
And the markets in 2010, up to anyone at least had a market focus on what the Fed
is going to do and what how inflation is going to play out.
So, you know, I think a lot of bitterness in China and discomfort, of
course, if China eases up on the Covid-19 Covid 0 Covid policy.
I think that's going to be really fantastic news for the global economies
and global stock markets. But it doesn't seem that way.
I mean, that's so. So it could be a silver lining if they
ease up on Covid. I mean, the other risk factor is the
upcoming midterm elections in the United States.
I just want to run you through a soundbite here from Larry Summers, the
former treasury secretary here. Here's what he had to say.
Frankly, the Fed doesn't listen and if anything, feels more pressure to prove
its independence so they don't influence short term rates and what the Fed
actually does. But they do raise questions in the mind
of market participants and they raise long term rates.
NYSE, we're seeing the Fed is the only game in town.
If that's the case, can the political heat get reflected in some of the Fed's
thinking over the next few weeks? Well, you know, I I think, you know,
there's gridlock in the US Congress right now.
You know, the Democratic Party has control of Congress over the Senate, a
marginal majority in the Senate and, you know, a more sizable majority in the
House of Reps. That changes and we see a gridlock.
And, you know, the Democratic Party with its control over the House of Reps.
And we have a divided U.S. Congress.
You know, we've a Democratic president historically.
That's actually good news for the stock markets.
Monkey typically done quite well because we're not going to see anything dramatic
coming out of the US government, which leaves the Fed to do its job in fighting
inflation and not worry about what the government might do next.
Because if the government does anything too aggressive, either we left or right.
You know, that complicates the picture in the Fed.
But a gridlock is going to be good news for the markets.
That's what markets tell us historically.
I like investing playbooks because they give you something to work with in times
of intense market volatility. Just look at the script and execute for
clients who are looking at their portfolios.
What changes now? What do they need to do?
Well, you know, I think what we are telling clients is do not be too
negative. I mean, you have clients who are sitting
on idle cash and very worried about the outlook in the markets.
Some of them buy on dips and then they see the markets go even lower and
they're worried. I mean, it's understandable, but we're
telling them that the markets have come off sharply already.
The bond markets and the equity markets, or as we discussed earlier, I mean, a
lot of Hang Seng priced in. I don't think the recession recently
priced in yet. We could see a bit more downside.
But it's they hard to catch the bottom. So what we're telling clients is stay
investor. Don't buy aggressively, Bill, but do buy
gradually. If you're looking to buy on dips and
take a medium term view, the next two to three years could be a good time for
equities. When you buy at such levels, but in the
short term, clearly there's going to be volatility.
Pick somebody with a medium term horizon risk appetite who can see the blue
skies. Right now we're in the middle of a storm
and it's hard to see blue states, but very often that's where the best
opportunity to.