On Wednesday, the Fed raised its target fed funds rate by 0.75% to a new range of between 3% and 3.25%, its third 0.75% rate hike in four months.
What Happened: Scott Minerd, founding managing partner, chairman, and global CIO of Guggenheim Partners appeared on CNBC’s ‘The Exchange’ to discuss the Fed’s rate hike decision and how Fed policy will impact the direction of the market.
According to Minerd, a full 1.0 bps hike would have been better, as there is more hiking to come in the future.
He mentioned that there is a very high probability that the Fed over-tightens to prove its credibility, adding that they will continue to push until something breaks, most likely the equities market or emerging markets
Additionally, Minerd said, “I think the Fed is pushing hard on the market at the same time it is shrinking the balance sheet”, adding that we went through this same scenario in 2018 when Fed Chairman Jerome Powell said, “The balance sheet reduction is on autopilot”.
Following Powell's statement, the market dropped 20% and the Fed was forced to pivot, raising rates and shrinking the balance sheet in the first quarter of 2019.
Why It Matters: With the potential for another 20% downside in mid-October, Minerd believes that investors who are long on risk assets will feel more pain, as the market has never bottomed while the Fed was raising rates.
Minerd reported that the fourth quarter may be a very good time to buy equities, as he is expecting the Fed to slow down its rate hikes, with a 50 bps hike in the November meeting and a 25 bps hike in December.
As P/E multiples are trending higher than historical averages during times of inflation and rising interest rates, Minerd expects market gains to be given back and a reduction in earnings guidance. He points to large delivery carriers such as FedEx Corp FDX as having already reported weaker earnings ahead of its first-quarter earnings release.
Earnings estimates could come down as much as 5% or 10% as we head into the end of the year, especially with the Russia-Ukraine war negatively impacting the global economy, Minerd said.
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