It’s Time To Save

Analyst Elena Beliaeva discusses the implications of the recent announcements from the United States Federal Reserve.

This week has brought a lot of food for thought for financial market participants. There was both positive and negative news. Wednesday, Sept. 22, started with some promising updates. One of the units of China’s Evergrande Group vowed to make onshore bond coupon payments. Earlier, traders had worried that Evergrande might default on its debt, but now investors have concluded there is no longer a threat and have begun buying market assets that had dropped in price.

However, the same evening, the Federal Reserve curbed the optimism among investors and the unfolding positive dynamics by announcing rather disappointing news. The United States’ main financial regulator decided to keep the base interest rate at 0-0.25%. Nevertheless, the Fed’s first announcement about its commitment to current asset purchasing programs served as a positive signal to the market. Fed Chairman Jerome Powell discouraged investors by stating that during the upcoming session in November, the Fed could “quickly” decide to scale back loan stimulus programs by the spring of 2022. Federal Open Market Committee members expect the first rate increase to happen by the end of 2022, even though they had planned it for 2023 during their previous meeting. These statements caused the dollar to soar, deflating optimism among traders. Furthermore, the Fed estimated that in 2021, the U.S. gross domestic product would drop from 7% to 5.9%, while the unemployment rate would increase from 4.5% to 4.8%, and inflation from 2.1% to 2.2%.

During a press conference, Powell stated that the economic recovery in the U.S. was making progress, allowing the Fed to plan for rolling back stimulus programs. Yet, Powell stressed that this would only happen if the U.S. economy grew significantly. Powell clarified that the Fed was specifically looking for improvements in employment and price stability, asserting that inflation had reached the desired 2% level, but that the labor market was lagging. Thus, Powell’s testimony did not make it any easier for traders to figure out exactly when the Fed would scale back stimulus programs or by how much. The fact that the main regulatory agency was sending mixed signals created temporary market volatility, although by the end of the day, all indices stabilized to their pre-press conference levels.

Notably, some Federal Open Market Committee members also shifted their positions. Nine out of 18 members were in favor of raising interest rates in 2022. In June, only seven members had supported this idea. Powell argued, however, that those officials who had predicted the increase in interest rates expected low unemployment rates. This probably means that if the situation in the labor market does not improve significantly, the Fed will raise interest rates later than it had planned.

There was good news in Powell’s statement about Evergrande’s potential default. He asserted that this would be exclusively China’s problem, and that it would not directly affect the United States.

Moreover, Powell suggested that Congress should raise its debt ceiling sooner rather than later, warning that defaulting on debt would severely damage the U.S. economy and financial markets.

Powell’s statements will probably discourage traders from buying during the downturn. We will probably observe new local minimums on index charts soon. At the same time, now is not the time to introduce any major changes. Before the Fed meets again in November, investors will find new reasons to be optimistic. Of course, over time, uncertainty will increase, and at some point, consolidation will be inevitable. But this is unlikely to happen now.

What can investors do to get through the current changes? First, they will have to revise their portfolio structures and stick exclusively to fundamentally stable, reliable and profitable companies. Second, they will have to devise a line of retreat, that is, they will have to come up with a plan concerning what positions they are going to close and when they plan to do so. Finally, investors need to stay optimistic and remain calm when stock market prices decline. In any case, correction in the stock markets is normal and will eventually pass, just like the seasons. Spring always follows winter. We just have to wait.