Investors just got the best possible outcome from the latest Federal Reserve Open Market Committee meeting. Economic growth, employment and inflation were all revised sharply higher for 2021, but interest rates are projected to remain at zero for the next two years.
The S&P 500 reversed early
declines of 0.4% to close 0.3% higher at a new record of 3,974. Yields on the US 10-year Treasury remained
elevated as Powell didn’t see the urge of taking action or talking down long-term
interest rates. Meanwhile, the dollar was the biggest loser of the event,
falling against most of its major peers.
Given this kind of environment,
the ingredients for higher equity markets remain in place. You have a rapid
economic recovery coming out from an induced coma, a Federal Reserve unwilling
to pullback from emergency measures and a large amounts of US fiscal stimulus
finding their way into equities by retail investors. However, this isn’t a “buy
everything” situation. The higher bond yields move from here, the more
challenging it becomes for growth stocks to resume their upward trajectory.
Highly priced Tech stocks trading at elevated multiples compared to historic
averages will likely remain under pressure in the short to medium term, so it
makes sense to reduce their weight in portfolios.
On the flip side, value stocks
such as those in financials, energy, materials and industrials are the ones to
benefit most from this environment. Is it not only fundamental factors, such as
easing lockdowns and improving profitability that will lead those sectors to
outperform, but also technical ones. The MSCI
World Value Index has outperformed the MSCI
World Growth Index by more than 10% from the beginning of November last
year. Many value stocks are likely to become momentum ones, leading to more
systematic trading systems picking them up in their portfolios, hence we expect
the outperformance of value stocks to continue in the short to medium term.
While the dollar index fell 0.5%
following the FOMC meeting, the ongoing rise in yields and widening spreads
should continue to lend support to the greenback. Traders will keep a close eye
on the upcoming monetary policy decisions from the Bank of England today and Bank of Japan tomorrow but expect both to
echo the dovishness heard from the Federal Reserve.
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