By Rebecca Ellis
SAT, 03 SEPT, 2022-theGBJournal| The end of August brought us the annual event of Jackson Hole, where central bankers in the US meet for their annual summer convention to discuss the ongoing situation and strategy for the US economy.
The last two years’ editions have mostly focused on the impact of Covid. This year, moving into a post covid economy, the topics were about dealings with the overhangs of covid, the main topic being inflation. In 2021, inflation was 4% and it was deemed something that the markets would correct in time, with little consideration of markets becoming more complex. The mild response did not consider unexpected supply shocks, in the context of the post-pandemic shift towards consumption of goods, the constraints on energy supply and now the war in Ukraine.
In this year’s edition of Jackson Hole, US Federal Reserve Chair Powell made an unusually short speech, lasting eight minutes, but also one of the most predictable ones on record. There was no grand philosophical vision and there was not much in the way of forward guidance. The lack of depth and new information was enough to create volatility in the equity markets and push share prices lower, again in an already challenging year.
So why are markets down after Jackson Hole?
- Lack of information for future direction
Powell did comment that policy would need to be restrictive for some time and while Powell has trashed forward guidance. Lack of information makes markets uneasy, nervous and this tends to increase fears by people exiting the markets.
- Confidence in decision makers
The Fed has a dual mandate to maximum employment, stable prices, and moderate long-term interest rates. The Fed’s heightened emphasis on jobs in August of 2020, as at the time inflation was nonexistent – and had been nonexistent for most of the previous decade. Officials were convinced, at that point, that the central bank had erred in the past by not encouraging more job growth and instead had raised interest rates even without a clear inflation risk.
Restoring employment was the sole focus of the fed and little regard with given in 2020 as he discussed the Fed’s review of their monetary policy framework, he said that “The persistent undershoot of inflation from our 2 percent longer-run objective is a cause for concern”. And even in 2021 as inflation had risen above target, Powell discussed why the inflation spike was likely be temporary, citing factors such as the absence of broad-based price pressures. These policies has given many more fear that the biggest economy is not being lead efficiently
3 Policy Definition – Higher interest rates and then reduction of the money supply
The other reason for the negative market reaction is perhaps in part due to investors’ equating the word ‘policy’ with monetary policy. However, quantitative policy (adding money supply for the last crisis and covid) also needs to be considered as a part of this process and will likely continue to be restrictive after the monetary policy tightening has concluded. Such a stark warning from the Fed’s Chair may be testimony of the beginning of the end of monetary tightening.
So, what have markets learned?
In truth, really nothing. The uncertainty around Fed policy is likely to continue. This uncertainty does create unnecessary economic damage. In part, it is due to the weird economic situation of the post-pandemic era, but it is also of the Fed’s own making.
It is not difficult to understand why central bankers say what they are saying. They have a clear mandate to control inflation on which they have failed to deliver. Not just headline inflation, but core inflation (excluding energy and food) has been above target for a prolonged period.
The other pain in the side of the Fed is with inflation increases jobs opportunities have increased and unemployment remains low, meaning a slow-down in demand will not happen as fast as if there is higher unemployment. This notion disrupts the economic fear that a recession is guaranteed and adds another dilemma to the central bankers. A moment to celebrate was missed, it seems, by not considering wider factors which could impact an overshoot.
Historically, September is a seasonally volatile month for the market. This year, that dynamic could be exacerbated by another expected Federal Reserve interest rate hike to fight persistently high inflation — the by-product of which would be to tap the brakes on an already slowing economy.
Investors are facing “inflection points,” such as macroeconomic changes, adoption of new technologies and a shift in central bank monetary policy; all of which create new investment opportunities but can also make for difficult transition periods for some companies.
Earnings guidance for the second half of the year is coming down as companies feel pressured by the current environment. This is something we expect, and we have been aligning and repositioning portfolios into higher-quality companies with superior balance sheets to withstand many of the challenges ahead. However, we must acknowledge that if the market continues to remain in a state of fear, we are expecting a difficult month ahead.
We see market downturns as opportunities to buy shares of high-quality companies at better valuations. These are times to be cautious and to high-grade positions paying a dividend and adding gradually. The negative sentiment will abate and, as always, markets will rebound strongly, and the better companies will strive once again.
If you would like to discuss any of these topics we will be pleased to hear from you and please get in touch.
Rebecca Ellis is a Personal investment advisor, based in Zurich| rebecca.ellis@pomonawealth.com|pascal.crepin@pomonawealth.com
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