Investors still wait for stock prices to decrease despite the recent market slump engulfing Wall Street.
As the Federal Reserve battle to fight inflation, the interest rate hike-induced stock rout has wiped out all the gains made by S&P 500 during the summer. The enticing corporate bond yields have not yet influenced the investors who have preferred keeping money in cash. Investors continue to wait for the central bank to tighten the monetary policy more and inflict pain on the economy to bring down inflation. This will present a better buying opportunity for them.
Citrix Debacle
The underwriting loss suffered by major US banks on the Citrix Systems Inc. loan deal highlights the tight market for raising capital in Corporate America. The timing is when the companies are facing declining profits. Valuations of stocks are below the level of the multiyear peak, but they may still fall further after S&P 500 doubled after recovering from the bottom during the pandemic. Despite the treasury yields being at the highest level in over a decade, the inflation-adjusted rates give it scope to go up further.
The fall in asset prices will make Fed chairman Powell and his colleagues happy as they have been saying for six months that inflation will not come down until the excess in the stock market eases. Since March, the central bank has begun tightening monetary policy. As a result, the 10- year treasury bond yield has jumped more than 1.5%, while the stocks have slumped by 20%.
On Thursday, the S&P 500 fell for the third straight day, giving the worst performance on a day of a Fed meeting since 2021. The investors are now paying heed to the Fed message. Post the era of monetary stimulus; asset price cooling is necessary to bring down inflation in the broader economy.
Neel Kashkari, the Fed president of Minneapolis, had said in late August that he was pleased with the market slump after Powell’s black hole speech. On Wednesday, Powell, in a press conference, repeatedly referred to the labor market’s unusual strength.
As per Bloomberg data, more than $5 billion has drained into the equity traded fund exchange. The market is punishing speculators in the meanwhile. A Goldman Sachs tech fund comprising non-profitable companies by having plunged 12% in September, displaying the worst monthly performance since summer.
There are no signs of investors’ panic leading to liquidation or stress during the decline in prices across all asset classes. According to Kim Forrest of Bokeh Capital Partners, the current backdrop makes sense to hold out and wait for further drop as Fed continues on its warpath.
Forrest, the Founder and CEO said that in its strategy to kill inflation, it looks like Federal Reserve will destroy the economy too. This is the reason why there are no buyers.
