Rewarding the value hunters

By Greg Smith

This has given rise to some concerns over stock market valuations, which have been elevated, particularly in the technology sector. Central banks have been responding to the inflationary pressures resulting from (successful) stimulus initiatives administered during the pandemic. These inflationary pressures have of course intensified following Russia’s invasion of the Ukraine last month, which has sent prices for oil, nickel and wheat (amongst other commodities) soaring.  

After an initial downward lurch following the onset of war, markets have stabilised. Investors appreciate that the world can find other channels for sourcing much of what Russia supplies, and for longer than Russia can probably stay solvent. The pressing need for interest rate tightening however has not gone away however, with inflation at multi-decade highs in New Zealand and in many other countries around the world.  

The New Zealand central bank was a lone wolf in embarking on a tightening journey last October, but other central banks are following suit, led by the US. Recently Jerome Powell indicated that the Fed was ready to raise rates sharply if needed to counter inflation which he said was “much too high.”  
Powell’s comments come less than a week after the Fed declared a lift-off on rates for the first time in three years. Ten-year US Treasury yields have since surged to around 2.4% after Powell indicated that the Fed could raise rates by more than 25 basis points at each meeting if necessary to contain inflation. The markets have been pricing in 25 basis point hikes at each of the six remaining FOMC meetings this year.

The reaction to the comments from the Fed Chair highlight the sensitivities around the rate tightening journey. This is new territory for investors after an era of ultra-low interest rates. But there is also cause to believe that the broader markets can acclimatise to the ascent in interest rates, even if the bar of expectation for higher priced stocks will become a more challenging one.