I have seen multiple market cycles and it is useless for someone like me to understand the impact of the US Federal Reserve on the market.
Television pundits (or as I call them stock market astrologers) say the stock market is pricing in a 75 basis point increase as the Dow Jones was already down before it entered the event. would say
However, US and other global markets fell another 5% after the rate hike.
Well, the reason thefed stayed away from rate hikes was the speed at which rate hikes occurred. In fact, some optimists wanted him to cut rates in 2024. With the Fed’s hawkish comments, that’s clearly out of the question.
Perhaps that’s what took the market by surprise.
The reason I started this analysis of the US Federal Reserve’s monetary policy is that I am trying to present a contrarian view.
First of all, in my opinion, the US Federal Reserve has lost all credibility. Its recent behavior suggests that it is observing in the rear-view mirror rather than deeply understanding the problem.
Now, I’m not arguing whether the stock market has bottomed out. He said the market could fall significantly from here if the negative news stream continues.
Here’s what I observed…
The most important observation relates to inflation.
Inflation is historical data, but investment decisions are forward-looking.
So when the world is so negative about inflation, why am I so hopeful?
The main reason is this…
1) U.S. house prices have started on a downward trajectory
Analyzing the U.S. inflation component, the devil is in housing, which is nothing more than a reflection of commodity prices.
See the big picture
In the US, housing, a central inflation driver, was extremely hot through April 2022.
However, the rise in median house prices is beginning to moderate. In fact, August 2022 prices fell for the first time in his decade.
This will lead to inflation decelerating sooner than expected, as the housing market is the main fuel for blistering inflation.
From the chart below, we can see that US house prices are trending downward.
Median U.S. Home Price Rise
Inflation could peak in 2022 due to a combination of weaker demand, improved supply, an average reversal in commodity prices, and the ‘base effect’.
US real estate contributes 18% of US GDP. When compared to world GDP, it represents 4.5% of world GDP. No wonder the 2008 crisis was devastating.
2) Commodity market softening led by crude oil
Who could have predicted that oil prices, which plunged into negative territory for the first time in May 2020, would soar to $130 in less than two years?
Geopolitical tensions and free-money effects boosted demand, but the results were disappointing.
With interest rates rising, oil prices are down 30% from their recent peaks. We believe this will lead to a significant reduction in inflation going forward.
Prices of agricultural commodities and metals fell sharply. The agricultural index is down 37% this year, he’s down 35-40%, as are copper and aluminum, which have sparked inflation in consumer durables and capital goods.
What about future inflation?
I think commodity prices will fall further.
⦁ China factor
China is the largest consumer of most commodities. It is the world’s largest consumer of steel and copper. Consumes his 14% of the oil produced in the world.
China’s economy is slowing and cannot expect the 9-10% growth rate achieved over the last decade.
The question to be asked is, how will commodity prices rise if the giant dragon slows down? In addition, the export market to China is expected to slow down due to environmental regulations.
Inventories have also increased, indicating that the oversupply has been resolved.
⦁ Fares have fallen significantly and are expected to fall further
Global fares drop more than 40%
In a nutshell, inflation is not as sticky as people fear as key components of inflation are expected to fall. I have.
So where would India be positioned then?
India is the perfect mix of…
Consumption demand + increase in disposable income + capital investment cycle
Imagine these tailwinds as oil prices drop to $60.
Stronger monsoons also mean stronger cash flows for farmers and stronger demand in rural areas.
48% of India’s CPI is food and 15% is energy prices. With about 60% of the inflation component expected to be subdued, would you say that inflation has peaked out?
In my opinion yes.
Does this mean that “all will be well” in the future?
Well, life and the stock market are not an either/or.
Inflation may have peaked, but the problems caused by the US Federal Reserve’s “helicopter money” still lurk.
Your concern could be any of these…
⦁ What if the Federal Reserve goes too far in raising interest rates?
⦁ What if rising interest rates lead to more defaults in the US housing market?
⦁ if geopolitical issues intensify and energy prices rise, especially in Europe,
⦁ Inflation returning sharply?
Apart from all this, the biggest risk is currency. The Indian rupee is depreciating against the dollar. An inflow of money to the US would hit all major economies, including India.
I think the only thing an investor should track is currency. For the Indian market to rise or remain stable, the currency needs to stabilize.
If that happens and there is no financial or geopolitical disruption, I am confident India will outperform.
Disclaimer: This article is for informational purposes only. This is not a stock endorsement and should not be treated as such.
This article is syndicated from Equitymaster.com
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