As investors awaits details of when and how the Federal Reserve plans to taper its massive monetary stimulus — and with inflation running as hot as ever — at least one investor thinks the market is likely to pull back from records as the central bank confronts price pressures that are throttling businesses and consumers.
“If they don’t admit to the fact that inflation is here to stay and it’s not transitory, they’re going to lose a tremendous amount of credibility,” KeyAdvisors Group managing partner, Eddie Ghabour, told Yahoo Finance Live on Monday.
Expectations are running high for the Fed to lay out its plans to unwind $120 billion in monthly bond purchases. Ghabour said the market is looking at the Fed’s “tone” in tapering as inflation picks up and growth slows.
Prices are surging everywhere, and companies reporting third quarter earnings have almost uniformly pointed to headwinds from rising inflation and the supply chain crisis. The fundamentals should nudge the Fed in a more “hawkish” direction, Ghabour added, and that could lead stocks to pull back from their records, at least for now.
Although investors turned “bearish” in September, Ghabour said that could change soon: “I think any dips are going to be bought here in the fourth quarter, we continue to be extremely bullish.”
Still if Fed policymakers lay out the plan to reduce the bond buying more rapidly than anticipated, it could signal hike rates earlier and faster than projected next year.
“I think the Fed has put themselves in a really bad spot because by delaying the tightening process, that means they’re going to have to accelerate it,” Ghabour said.
‘Healthy correction’
Yet the leap in inflation has been triggered mostly by post-lockdown demand, which remains unusually strong even as growth slows. Tailwinds from the reopening economy, however, are being negated in part by COVID-19 related supply chain bottlenecks. Still, Ghabour doesn’t expect Fed officials to raise rates in the first half of next year like they indicated.
“The longer you delay the tightening process, the hotter inflation gets and the bigger hit the consumer is going to take and then ultimately the market at some point in time,” Ghabour added.
Last month, Fed officials signaled that they would start pulling back on some of the stimulus the central bank had been providing during the financial crisis.
That could lead to a “healthy” 15-20% correction in the first part of 2022, Ghabour stated, as growth slowly but surely comes back to earth.
The U.S economy grew at a 2% rate this quarter, its slowest gain of the pandemic-era recovery, as supply chain issues and a marked deceleration in consumer spending stunted the expansion.
Ghabour noted that it’s “mathematically impossible” for the consumer to have as much discretionary income next year compared to this year because the cost of gas, food, housing and rent are through the roof.
Combined with lower growth and a tightening Fed, “ that’s like the worst equation for the market,” Ghabour added.
While inflation is running hot, the job market isn’t back to full strength. The unemployment rate was 4.8% in September, above its pre-pandemic level of 3.5%.
Meanwhile, Fed Chair Jerome Powell has said that he would like the job market to show further improvement before the Fed begins to raise its key short-term rate.
“You’re going to start to see the labor market get stronger and stronger, especially with kids back to school, and with certain benefits falling off, but understand that employers have to pay up, it is a tight labor market right now,” said Ghabour.
With oil near multi-year highs on soaring global demand, the investor sees more gains ahead for both natural gas and crude oil.
“We’re very bullish on natural gas,” said Ghabour. “We haven’t even hit the cold season yet [but] Europe uses natural gas so much that we cannot see a scenario where natural gas does not go up.”
In all, he’s suggesting investors should start “playing defense” as we head into January and February of next year.
He’s expecting next year to be a different story: “inflation will then become a headwind, not a tailwind, not only for economic data, but a potentially pretty big drop in the market.”
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter: @daniromerotv
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Source: finance.yahoo.com