Fighting the Fed: The next choice for ASX investors

To fight the Fed or not… ASX investors have a choice to make, to believe the RBA and the Federal Reserve, or bond markets.
The post Fighting the Fed: The next choice for ASX investors appeared first on The Motley Fool Australia. –

A businessman in a suit and wearing boxing gloves, slump in the corner of a ring, indicating a corporate fight between ASX companies

The phrase ‘don’t fight the Fed’ came into prominence during the coronavirus-induced share market crash last year. And it proved remarkably salient. After all, it is widely accepted that the Fed’s intervention last year helped the US markets (and the S&P/ASX 200 Index (ASX: XJO)) find their bottom after the shortest and sharpest market crash in history. The Fed’s declaration that it would turn the quantitative easing (QE) taps to fully open last year occurred just before the markets started slowly climbing on 24 March 2020.

After this happened, investors started telling each other that you ‘never fight the Fed’ when it comes to investing. In other words, what the Fed says, goes.

Well, fast forward a year (and some) and investors are faced with a strangely similar conundrum. Both the Federal Reserve and the Reserve Bank of Australia (RB) have been trotting out a consistent line over the past few months. That line goes something like this: ‘Interest rates will not be going up until inflation is between 2-3%. That won’t happen until unemployment is low and economic growth is high. And we don’t expect this to occur until 2023 at the earliest’. Indeed, the US Federal Reserve chair Jerome Powell just recorded an interview for the US 60 Minutes program yesterday. Here’s some of what he said on inflation and rates:

Well, what we said was we want to see inflation move up to 2%. And we mean that on a sustainable basis. We don’t mean just tap the base once. But then we’d also like to see it on track to move moderately above 2% for some time. And the reason for that is we want inflation to average 2% over time. And when we get that, that’s when we’ll raise interest rates….

I think it’s highly unlikely we would raise rates anything like this year, no. Other members of the Fed board don’t see a rate increase even in 2022.

The RBA has made similar comments in recent weeks.

To fight the Fed or to not… that is the question

What is interesting is that investors are not taking these central banks seriously. As we’ve been discussing for a few months now, long-term government bond yields have been steadily rising over the past two or so months. The rises are telling us that the bond markets are pricing in higher inflation and interest rate hikes much sooner than 2023 or 2024. 

So it appears the old ‘fight the Fed’ adage is losing steam. But here’s the problem for ASX investors. Some investors have indeed been reacting to rising government bond yields. That’s why we have seen immense volatility in ASX tech shares and other ASX growth shares over the past month or two. These investors are ‘fighting the Fed’ by extension because if the Fed is right, and rates don’t move until 2023, the bond markets are wrong. And therefore making investment decisions based on these moves is also misguided. 

It’s an interesting dynamic to be sure, and one all ASX investors might want to keep an eye on. Someone will be right and the other won’t be. And that’s a binary that investors won’t want to be on the wrong side of. 

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post Fighting the Fed: The next choice for ASX investors appeared first on The Motley Fool Australia.

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