The world’s largest wealth manager explains how the Fed has completely altered how the stock market works — and says the S&P 500 can climb another 9% by next June
Federal Reserve policy has thrown off a key trend in markets, but Mark Haefele, chief investment officer atWhen stocks rally as rapidly as they have through the second and third quarters, Treasury yields usually jump. Investors shift more cash into stocks and risk assets and pull capital from safe havens like government debt, in turn boosting yields. Yet Treasurys sit at historic lows while economic data improves and stocks touch new records.
The shift arrived in June, when Fed Chair Jerome Powell said at the month's Federal Open Market Committee meeting that the central bank was "not even thinking about thinking about raising rates." The statement is "perhaps the moment investor expectations really changed," Haefele said in a letter. Yields disconnected from stocks and trended downward. Apart from a mild gain in August, they've steadily declined through the summer.
"Investors now face a stark choice," the investment chief said. They can either hold on to precedent and view the bond market's pricing as a harbinger for a stock market correction, or believe markets are now "more heavily influenced by Fed policy" and pile in accordingly. "If you, like us, believe that the latter currently reflects reality better than the former, your focus needs to shift to what the Fed is saying, and the way you think about asset prices needs to shift with it," Haefele said.
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