When the two-day U.S. Federal Reserve meeting ended, Fed Chair Powell said that interest rate hikes will happen sooner. Markets hoped that hikes would happen no earlier than 2024. But with rampant inflation and runaway growth, the central bank cannot afford to react too late.
Stocks fell sharply to adjust for higher rates by 2023. At first, the market shifted from traditional companies listed on the Dow Jones and bought NASDAQ-heavy stocks. Buying the FAANGM stocks – Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), Google (NASDAQ:GOOGL), and Microsoft (NASDAQ:MSFT) – makes little sense. The pandemic is easing in the rich nations. Goldman Sachs (GS) is already pushing workers to return to the office.
The work from home trade, which includes all the FAANGM stocks, may underperform. Investors should lighten up on stocks in general. Still, markets will continue to bet on a transitory inflation rate. The 5% inflation in May may prove temporary. Furthermore, rising energy prices might slow soon. The Organization of the Petroleum Exporting Countries has the option of increasing supply to maximize revenue, taking advantage of higher oil prices.
Your Takeaway
Watch U.S. short-term bond rates. If yields rise, then the asset class becomes more compelling and less risky than stocks. That would hurt stock prices.