Hawkish Fed: 3 reasons why the stock market is rallying in spite of a hawkish Fed – The Economic Times

Clipped from: https://economictimes.indiatimes.com/markets/stocks/news/3-reasons-why-the-stock-market-is-rallying-despite-a-hawkish-fed/articleshow/90286660.cms

Synopsis

Even though the correction in Nifty by 15% from the peak had cooled valuations a bit, the recent recovery has again pushed the valuations up. Therefore, investors should prefer value to growth in these times of uncertainty. Preference for value over growth is a global trend now.

V K Vijayakumar

Chief Investment Strategist, Geojit Financial Services

He is known for his articles on capital markets, wealth management, and Indian and global economy. He has presented many papers and delivered many lectures on the capital market in national and international seminars. He has authored four books on economics, presented eight papers in international seminars and 65 papers in national seminars.

Federal Reserve’s rate hike of 25 basis points was on expected lines, but the projection of another six rate hikes this year to take the rate to 1.75 to 2 per cent by the end of 2022 was not completely expected. This is certainly a hawkish stance, which should have disappointed the market under normal times. But the US market, after an initial negative reaction, staged a smart recovery lifting the S&P 500 and Nasdaq by 2.24 per cent and 3.7 per cent, respectively.

Here are three reasons behind the rather surprising market reaction:

1) In the press briefing after the policy announcement, Fed chief Jerome Powell asserted: “the economy is very strong and well positioned to handle tighter monetary policy.” This calmed the markets.

2) The markets were over-sold amidst heightened volatility. Short covering in an over-sold market leads to sharp recovery.

3) With the Fed’s projection of seven rate hikes this year, uncertainty is out of the way. Uncertainty keeps markets on tenterhooks. Markets like certainty, which the Fed speak provided.

Even though a hawkish Fed is normally regarded negative for equity markets, history tells us that market returns following the rate tightening are good. A Deutsche Bank study of 13 rate hike cycles shows S&P delivering 7.7 per cent average returns in the year following the hike. Since rate hikes happen in the context of economic recovery, the consequent corporate earnings growth justify resilient markets.

In India, a major positive development from the market perspective is the FPIs turning buyers after relentless selling for long. The FPI selling which had touched Rs 4,000-7,000 crore a day has been steadily declining in recent days and they turned buyers on 16th March. The market resilience in spite of relentless FPI selling is a new development that has implications for Indian market going forward.

Even though the correction in Nifty by 15 per cent from the peak had cooled valuations a bit, the recent recovery has again pushed the valuations up. Therefore, investors should prefer value to growth in these times of uncertainty. Preference for value over growth is a global trend now.

In India, there is value in financials now. Stocks of high quality banks and mortgage firms have been depressed due to sustained FPI selling. They are attractively valued now. Rising credit demand and improving asset quality augur well for banks, particularly those that are adequately capitalized like the leading private sector banks and a couple of large PSU banks.

IT stocks are highly valued. But this sector is in a multi-year expansion phase and the earnings visibility justifies the high valuations. Construction-related segments, pharma and specialty chemicals are on a strong wicket.

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