- The problem this time is that investors are concerned not just about policy tightening, but rising recession risks and unconvinced that the Fed can engineer a soft landing amidst a sea of macroeconomic challenges.
- Dividend-paying stocks are back in vogue and defense contractors have been soaring on the back of heightened geopolitical risk.
The last time the U.S. Federal Reserve attempted to tighten policy in October 2018, a shakeout in global markets forced a hasty retreat that has since seen one of the loosest periods of monetary expansion on record.
But with price pressures hitting a 4-decade high in the U.S., everything from stocks to bonds is falling, even oil has pulled back from near records in a concerted cross-asset selloff that has echoes of the rate-spurred rout back in October of 2018.
The problem this time is that investors are concerned not just about policy tightening, but rising recession risks and unconvinced that the Fed can engineer a soft landing amidst a sea of macroeconomic challenges.
As the tide of monetary policy washes out, and with recession risks rising, investors are hunkering down, pouring into the U.S. dollar and companies that are expected to provide some form of safe haven during an economic slowdown, including previously unloved sectors like healthcare and consumer essentials.
Dividend-paying stocks are back in vogue and defense contractors have been soaring on the back of heightened geopolitical risk.
All of which do not bode well for the global economy because of fear of recession has superseded what would typically be expected in the wake of anticipated interest rate rises.
With just over a week into April, some of the best performers on the benchmark S&P 500 are soap makers, pharmaceutical companies, and utilities – hardly the stuff of an aspirational economy looking for new pockets of growth and inventing the next big thing.
The Fed unfortunately can’t do much about it because it may have its back against the wall with no end in sight for price pressures and they can justify more aggressive policy moves on the basis that there are few signs to be concerned about contraction.
As the U.S. labor market booms and consumer finance looks healthy, American companies haven’t shied away from capital spending, which would usually provide the first hint all is not week in the state of the economy.
But if stocks, bonds and oil end April lower, that will be the first time since 2018 that all major assets have suffered losses and what will be less clear is whether this is in response to policy tightening or concerns over an impending recession.
A worse-case scenario for investors is where the Russian invasion of Ukraine exacerbates already high inflation, against a backdrop of policy tightening by the Fed which plunges both the U.S. and Europe into recession – stagflation.
