There will be reckoning for investors who don’t adapt to a brand new investing playbook, says BlackRock iShares strategist

Traders work on the floor of the New York Stock Exchange on February 4, 2014. REUTERS/Brendan McDermid

  • There will likely be even more difficulty for US equities, a BlackRock iShares strategist told Insider.

  • Karim Chedid expects the Federal Reserve to keep interest rates above 5% for all of 2023.

  • “Goldilocks isn’t saving the day in our new playbook,” he said, given the Fed’s focus on inflation.

The Federal Reserve’s efforts to crush inflation have upended the traditional investing playbook, and anyone who hasn’t realized this will find their portfolio struggling, according to a BlackRock iShares strategist.

Karim Chedid told Insider he believes markets can no longer count on a Fed “put” – where the central bank eases monetary tightening to support falling stocks.

“In the past, we could rely on the central bank’s put when macroeconomic fundamentals deteriorated,” Chedid said. “Today we are in a very different environment.”

Chedid, Head of Investment Strategy for iShares EMEA, explained how the market has begun to react to a “Goldilocks” economic environment, defined by growth and inflation that is neither too hot nor too cold. .

He said the current economic consensus suggests 2023 will bring “tepid” growth and inflation, forcing the Fed to adjust accordingly, rejecting investment approaches that have worked in recent years.

“Goldilocks doesn’t save the day in our new playbook,” Chedid said. “Central banks are focused on one thing, which is to restore price stability.”

Stocks rallied in early 2023, with the benchmark S&P 500 climbing 4.4% and the tech-heavy Nasdaq Composite up 6.1% year-to-date.

Some investors believe the Fed will ease its interest rate hike campaign to support stocks and the economy at some point in 2023 as inflation has now fallen for six straight months.

The majority of traders expect the central bank to start cutting interest rates by the end of the year, according to CME Group’s FedWatch tool – but they could be bracing for a rude awakening, according to BlackRock’s Chedid.

He expects the Fed to gradually raise rates another 75 basis points from their current level of around 4.5% and then hold them above 5% for all of 2023. corresponds to what the political decision-makers have said.

Chairman Jerome Powell has repeatedly signaled that the Fed’s main objective is to control inflation. Two key regional Fed chiefs — San Francisco Fed President Mary Daly and Atlanta Fed President Raphael Bostic — said last week they expected policymakers to raise rates above 5% and hold them there to rein in the price spike.

“There will be swings in risk because markets will face a calculation – that central banks will not ease as quickly as they expected,” Chedid said. “We expect hikes then holds, as opposed to hikes then cuts, for central banks.”

This reflects a new environment where the Fed’s only priority is to control inflation, according to Chedid. The consumer price index inflation gauge rose 6.5% last month, meaning prices continue to rise at a rate well above the central bank’s target level of 2% .

The BlackRock strategist said he wouldn’t expect the Fed to even consider cutting interest rates significantly until wages – which continue to rise in the United States, according to the report on December employment – ​​have begun to calm down.

“We haven’t seen wages fall to an extent that would suggest being on track to meet the Fed’s inflation target and therefore the Fed will continue to tighten excessively, meaning going over 5%, probably at 5.25%,” Chedid said. “And then, above all, stay there.”

“They need more evidence to prove that they have really got inflation under control – until they do, they will hold rather than cut,” he added.

Read more: Paul Krugman says the Fed’s pessimistic view on inflation looks a bit hopeless now that price pressures are rapidly easing

Read the original article on Business Insider

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