Sharp criticism of US monetary policy: Stifel analysts accuse the Fed of creating the next bubble

?? Fed leaves key interest rate at low level
?? Stifel analysts draw comparison to dot-com bubble
?? First correction, then bubbles

Fed leaves key interest rate unchanged – faster tapering decided

Shortly before the end of the year, the US Federal Reserve recently announced that the key interest rate remained unchanged in the Leave a range of zero to 0.25 percent . Due to the current high inflation , the monetary authorities decided to exit the purchase program more quickly. In addition to accelerated tapering, three interest rate hikes were also promised for the coming year.

Will the central bank create the next bubble?

Encounter criticism the decisions of the Fed especially at Stifel – Analyst Barry Bannister. “Populism (which the US Federal Reserve and the US Treasury apparently support) leads to bad decisions and even worse results,” said the strategists around Bannister in a note that was available to the financial portal “MarketWatch”. “The rate suppression could create another bubble that will burst (as always), followed by a lost decade.” Accordingly, the US authorities have made bad decisions since the beginning of the corona pandemic in March 2020, which would soon take revenge.

Parallels to Black Thursday and Dotcom-Bubble

As evidence For this assessment, the market observers examined historical data. The S&P 500 collapsed by almost 20 percent in the third quarter of 1998, before the Dotcom bubble burst in March 2000. Although the Fed tightened its monetary policy from the second half of 1999 to the first half of 2000 and raised the key interest rate several times, this was no longer able to prevent the crash. The same thing happened in the 1920s, according to the analysts according to “MarketWatch”: When interest rates were raised in December 1928, the index collapsed by 10.7 percent. Then, in October 1929, the stock market crashed, which ultimately led to the global economic crisis.

Next bubble in 2022 or 2023

Now the Fed could put the The strategists believe that the third bubble in 100 years will be created. As “The Street” writes, the experts assume that the S&P 500 will initially slide to 4,000 points in the first quarter of 2022. The reasons for the correction were a strong US dollar and subdued growth in China , Called exit signals from the Fed and a generally tight global liquidity. However, if the Fed tightened its monetary policy much more slowly, it would lead to a bubble forming, according to the note. In the same year, but at the latest in 2023, things should then go up significantly – according to the Stifel forecast, the index could then be at 6,750 points. Most recently, the index of the 500 largest listed US companies was at 4,725.79 points (closing price on December 23, 2021). The strategists are assuming a level of 25,000 points for the NASDAQ Composite. This last closed at 15,653.37 points.

High risk appetite among retail investors

According to the strategists, the Fed The only way to avert the bubble is to follow its own financial stability report, in which the monetary authorities warn that retail investors are risk averse and that high valuations of stocks and real estate will continue to inflate the market. “Nevertheless, politics could come too late, and if the market becomes” risk-averse “with a falling equity risk premium and the ten-year Treasury Inflation Protection Security (TIPS) – Yield remains depressed at -1.0 percent due to the global central banks, there could be a convexity bubble in price-earnings in the years 2022 to probably 2023 Ratio (P / E) are coming “, warn the Stifel analysts.

This is how investors should react

To prepare for the bubble , advise the strategists of the financial service provider to adjust their own investment strategy ahead of time. The strategists see a simultaneous slump in both the S&P 500 and commodity prices as a warning signal. But if investors invest in defensive stocks in the S&P 500, they could protect themselves from a bubble, according to Bannister & Co. Specifically, the experts recommend stocks from the health, consumer goods, utilities and telecommunications sectors.

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