JPow said the party can continue
A soft approach on tapering and rates leaves room for more equity upside
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This week the FOMC reunited to discuss about FED monetary policy and the outcome was exactly as expected: FOMC decided to start tapering.
What that means?
It means that the FED will reduce monthly Treasury purchases by $10 Billion and MBS by $5 Billion. They announced a purchase reduction for November and December, but it should continue until summer 2022.
The timeline should be as below:
In June 2022 the FED should end its purchase programme. Then it should start to hike rates, but yesterday Powell has been very dovish and he stressed that the start of tapering doesn’t mean that they will raise rates any time soon.
Literally he said “We don’t think it is a good time to raise interest rates because we want to see the labor market heal further”.
In the past, markets did not reacted very well to Powell press conference, but this time has been different.
As you can see above, the blue line (S&P 500) went up sharply after press conference. We could probably consider this FED meeting as dovish (or very dovish).
Even the 10-Year Treasury Yield took a break from its recent ascent.
Moreover, the Bank of England added further dovishness, after it decided to not raise interest rates. That surprised markets, that were almost sure to see a first rate hike.
Maybe investors were expecting too much aggressive central banks?
OPEC+: more production, but not too much
The other big event of the week has been the OPEC+ meeting, that on Thursday decided to raise oil production by 400,000/bd for December.
U.S. tried to put pressure on OPEC+ countries by asking for a bigger increase (because too much high oil prices can be dangerous for economic recovery), but they didn’t obtain what requested.
Just at the beginning of the week BP reported that oil demand is back to pre-Covid levels, so a slow increase in oil production could lead to even higher oil prices (WTI already reached its highest price since 2014).
The latest move from OPEC could support oil prices and oil companies valuations. Moreover the recent pullback can even represent an opportunity for investors.
In case you want to invest in oil companies, I tried to make a research that could help you to select the best ones.
As I often do on my Instagram page (link here: Market Radar) I tried to select the top oil companies, in U.S. and Europe, most loved by analysts.
I made a screening on S&P 500 Energy and Stoxx 600 Oil & Gas with the following criteria:
- Analysts rating higher than 4.0 (buy)
- At least 8 analyst recommendations
Then I selected the stocks with highest potential return (based on last price and average target price).
Here the result in U.S. (S&P 500 Energy Sector):
And the top in Europe (Stoxx Europe Oil & Gas):
Of course this is NOT A FINANCIAL ADVICE. Make your research before to make any investment.
Where to invest now?
The recent central bank moves are slightly changing the macro picture: maybe investors will recalibrate their bets on rate hikes, assuming a less aggressive approach from CBs.
We can watch the effect of the last FED meeting in the most speculative investment areas, like Nasdaq 100, that skyrocketed after Powell conference.
As I told you several times, it would have been a mistake to sell your tech shares: in case of rising rates tech stocks can suffer and underperform the markets, but in the long term they are still too good to be sold.
Generally the outlook is positive on equities, that remains the most attractive asset class.
Just look at the last week performance of U.S. Equity indices:
Russell 2000 and Nasdaq 100 are the hottest indices of the moment, especially the last one, that just broke a very big resistance:
This break-out represents a sign of strength and a potential good entry point with relative low risk (you can set a close stop loss).
Rates could stay flat for a while, encouraging investors to put their money on tech and growth stocks, but be careful: if you choose badly you could be hammered. Some stocks had not reasonable valuations, and even a small miss on earnings caused a big price drop (just think to stocks like Chegg, Peloton, Moderna, Roku, Penn National Gaming and many others).
Better to diversify your plays: buy some big good tech (Microsoft, Google for example) and then try to make some more speculative play.
Moreover I still see Europe as a positive area, even if there is a potential Covid resurgence, while China outlook doesn’t seem very attractive at the moment.
Always make your research before to make any investment!
Have a great weekend,
Disclaimer: Market Radar is not an investment advisor. Any information provided as part of the services is impersonal and not specific to any person’s investment needs. You acknowledge and agree that no content published or otherwise provided as part of any service constitutes a personalized recommendation or advice regarding the suitability of, or advisability of investing in, purchasing or selling any particular investment, security, portfolio, commodity, transaction or investment strategy.