The Federal Reserve reigns in speculation

The Federal Reserve reigns in speculation

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Douglas Cote

Douglas Coté, CFA

Head of Global Perspectives Strategies

Remember way back when owning FAANGs1 was a badge of honor? Yes, a mere six months ago. Now FAANGs are a source of scorn. What happened? The Fed made an aggressive policy U-turn, raising interest rates and withdrawing liquidity from the economy and markets. The Fed’s quick pivot brought the hammer down hard on speculators ― hence the scorn for those caught swimming naked as the tide receded. But the pivot also inflicted collateral damage on plain-old, average investors, who were most likely following a trend ― aka “herding,” another source of behavioral investment risk.

Think about the housing market, for example: five years ago, prices seemed unrealistic but since then have nearly doubled, especially in resort towns. While there are generational trends that drive home ownership, at some point those trends likely will be reined in by the combination of elevated home prices, costlier mortgages and limited supply. Those buying homes at current prices may find it difficult to realize appreciation or build equity.

Turning back to the stock market, why do investors get caught up in euphoria when prices increase dramatically? Maybe it’s “FOMO,” or fear of missing out. In any case, the securities markets can quickly correct mispricings; but those who invest in the stocks and bonds of companies with real earnings, dividends and income likely will do just fine. For example, as of June 17, 2022, Refinitiv estimated year over year earnings growth at 11.3% for the S&P 500 index, pointing to simply solid fundamentals.

 

1 FAANG is an acronym that refers to the stocks of the five most widely known, mega-capitalization American technology companies: Meta (formerly known as Facebook), Amazon, Apple, Netflix and Alphabet (formerly known as Google). Source: https://www.investopedia.com/terms/f/faang-stocks.asp.

Voya Investment Management has prepared this commentary for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. Past performance is no guarantee of future returns.

The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Strategy holdings are fluid and are subject to daily change based on market conditions and other factors.

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