Stock markets will be mixed this week as investors brace for the crucial Fed meeting and rotate towards value stocks, according to the chief executive of a leading financial advisory and fintech.
The Federal Reserve policy makers’ meeting this week could signal the first lift-off in U.S. interest rates since 2018 as they try to combat red-hot inflation.
“After the dramatic recent volatility during which stock markets recorded their worst week in more than a year, markets will be more settled again this week,” said deVere Group’s Nigel Green.
“They will be in a holding pattern for much of the week as investors wait and see the outcome of the Fed’s meeting on Wednesday.”
Green said that many will be preparing to commit new capital to build portfolios, “as history teaches us that U.S. equities perform well when the Fed raises rates, as a growing economy typically supports corporate earnings growth and the stock market.
“Sentiment will also be muted as investors await earnings updates over the next few days from titans including Apple, Boeing and Deutsche Bank, amongst others.”
Return to value stocks
The deVere CEO added that the next weeks will continue to be defined by a rotation towards value stocks.
“After years of growth stocks’ outperformance, many investors are changing their mind and moving towards cheaper stocks which are based on earnings and cash flows.”
Value stocks, explained Green, are valued more based on near term cash flows, meaning they are not as “vulnerable to rate hikes for their intrinsic value”, whereas growth stocks are “much more valued on cash flows way into the future.”
He went on to add that, “expectations for tech stocks have been too high of late, so a slight miss could crush some investors. Of course, tech will continue to be a megatrend, but some companies are now oversold.”
Green’s comments echoed the sentiment that last week left the tech-heavy Nasdaq index in correction territory.
“Major policy announcements and big corporate updates will mean that global stock markets will be mixed this week, but more settled than in the first few weeks of 2022,” the deVere CEO concluded.