Equity markets have benefited in the past from the Federal Reserve’s pauses on interest rate hikes. But given current conditions, history may not repeat itself, economists at Morgan Stanley report.
Fed may now be done with its rate hikes
“Morgan Stanley’s economist forecasts the Fed won’t make additional rate hikes or cuts for the rest of this year. In market parlance, the Fed will now pause.”
“In 1985, 1995, 1997, 2006 and 2018, buying stocks once the Fed was done raising rates resulted in good returns over the following 6 to 12 months. And this result does make some intuitive sense. If the Fed is no longer increasing rates and actively tightening policy, isn’t that one less challenge for the stock market? current data suggest higher inflation and a sharper slowdown than past instances where the last Fed hike was a good time to buy. And for these reasons, we worry about lumping current conditions in with those prior examples.”
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Morgan Stanley, one of the major global financial service companies, issued a warning for equity markets this past week. While many investors are hoping for the Federal Reserve to pause their interest rate hikes, Morgan Stanley believes that the move could have negative implications for the equity markets.
The market anticipation of a Federal Reserve pause has been growing in recent weeks, as investors become concerned about a possible slowdown in the global economy. The concern is compounded by the fact that financial markets have experienced significant stock market volatility in the past month.
However, Morgan Stanley believes that the Fed “pause” could create an adverse effect on the stock markets. They point out that while the Fed may be able to provide temporary relief by not raising rates, this pause could create a false sense of security in the markets that could eventually lead to a drop in equity prices.
Morgan Stanley believes that a pause in rate hikes could lead to a lack of clarity and would make it difficult for investors to make decisions. Additionally, the pause could lead to an increase in demand for higher yielding investments, as investors look for safer ways to invest their money during the period of uncertainty.
The financial services company also warned that investors should be careful about chasing returns, as a sudden drop in stock prices could quickly make the “safe” investments look much less attractive. This could have a long-term negative impact on the equity markets, as investors could become discouraged from investing in the equity markets.
Overall, Morgan Stanley warns that the Fed’s pause may not be the best solution for the equity markets. They point towards a lack of clarity and an increase in demand for higher yielding investments during this period as reasons for caution. They advise investors to be careful with their investments and do not put their money into investments that look too good to be true.