Investors yearn for a “Fed pivot” out of hope that the change in the monetary policy would help stock market rebound in the year-end season. However, ungrounded optimism could bring about unwanted loss in assets.
Monday, November 14, 2022
Wishful thinking for Fed pivot
One of the terms most frequently cited in the financial market in 2022 would be “pivot,” as investors yearn for the Fed’s pivoting from its tight monetary policy that brought key stock market indices down throughout the year.
While the word pivot originated from sport, it is also commonly used in other policy areas such as economy and finance, as well as other domestic and foreign policies. In basketball, it is the act of putting one foot on a certain point of the ground while changing directions with the other one so as to move away from a defender(s). It is a way of avoiding the dribbling violation, or walking foul, as a player cannot take more than two steps without the ball being dribbled; with one foot fixed on the ground, however, he or she could take as many steps as he/she wishes by moving the other foot around. In policy areas, “pivoting” is regarded as “changing the direction” of important policies, while maintaining their crucial purpose or principles. One example well known to us on the Korean Peninsula is former U.S. President Barrack Obama’s “Pivot to Asia,” which changed the main regional pillar of his administration’s foreign and defence policies to Asia in the early 2010s.
With a lot of South Koreans investing in the U.S. stock market despite the time difference, “pivot” has become a common term to even the people who do not speak English very well as it appears too often on not only traditional news media but new media such as YouTube. Global stock markets including the New York bourses and the South Korean markets have continued to slide since the start of the year, although there were a couple of meaningful rebounds in the middle that some experts called “bear market rallies.” Now, with less than two months before the end of 2022, investors are anticipating for what they call the “year-end rally” and “Santa rally” in the stock markets.
Be cautious: Ungrounded optimism can result in unwanted loss
However, ungrounded optimism has been met with stern reality in what is seen as a repeated pattern in this year’s bearish markets. Investor sentiment tends to wish for a Fed pivot ahead of the release of economic data such as the consumer price index (CPI), among others, and possible Fed pivot. But the wishful thinking was meant to hit a grim reality of either rather negative data, or Fed’s even more hawkish stance, sending the stock prices back to lower levels.
Last week, Nasdaq marked the best weekly gain since March as the October CPI rose 7.7% on an annual basis, lower than the market expectation. Now investors are questioning how long this rebound could last, as there are few significant events until mid-December when the latest CPI would be revealed and the Fed would decide on the rate in the FOMC meeting. Hence, it is likely that the stock prices would continue their rally for a couple more weeks until early December with the growing hope for the Fed pivot. However, it is the pattern for the stock market indices to be hit with a slap from the cold reality - either the inflation data or the Fed’s stance. Optimism without a firm ground is dangerous, especially in this volatile market situation.
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K-News