Gertrude Chavez – Dreyfuss, Saqib Ahmed

NEW YORK, Reuters – Investors remain nervous about persistent inflation. They are trying to reduce risk in preparation for more turbulent times.

Wednesday’s Federal Reserve announcement by the Federal Reserve indicated that they will be reducing their monthly bond purchases. They plan to stop them altogether in 2022. It marked the start of their tightening cycle. However, it maintained that the high inflation rate would be “transitory”, and it likely won’t require an increase in interest rates. Investors called it a “dovish taper”.

The market reaction to the announcement was mild. After the announcement, the dollar fell while U.S. stocks rose. That may not hold long-term, according to investors.

(For graphic on Breakeven inflation rates – https://fingfx.thomsonreuters.com/gfx/mkt/dwpkregodvm/Pasted%20image%201635981069299.png)

People will feel more anxious if inflation continues to rise in an extremely strong manner. Investors may reduce their exposure to risk during this time,” Lon Erickson from Thornburg Investment Management Santa Fe (New Mexico), said. This could occur in the first quarter of 2022.

Erickson prefers assets with shorter duration in fixed income to guard against volatility and inflation.

With the bank’s ease money policies providing significant support to financial markets since the pandemic, the rate of change has been more than doubled from its March 2020 level. This has led to concerns over stretched valuations as well as a pile-up of comparatively risky assets like stocks.

Troy Gayeski (chief market strategist at FS Investments) stated that it is dangerous to play when financial conditions are so loose and the economy’s doing well. “It can also be risky when inflationary pressures rise this high. To run monetary policy in a crisis-like atmosphere, it would be risky,” he said. He recommends that investors look for inflation protection products and steer clear of investments such as long-duration U.S. Treasuries that see their values decline due to inflation. But it could set us up for really difficult 2022.

Chris Zaccarelli is the chief investment officer of Independent Advisor Alliance, Charlotte, North Carolina. He stated that given uncertainty about inflation and interest rate over the next twelve months, it was prudent to maintain equity exposure but shift his portfolios towards companies that have strong balance sheets, robust pricing power, and away from those who are more speculative.

Cornerstone Wealth’s chief investment officer Cliff Hodge stated that he is looking for lower volatility assets and better-quality investments in an environment of “dovish taper”.

Todd Sandoz, global equities co-head Barclays LON:) stated that the main question for equity markets will be whether earnings growth can balance against nominal rate increases.

“Where equities would really underperform is if inflation expectations and nominal rate increases…dramatically outpace earnings growth. This is where you see a terrible scenario for equity markets.

Although the benchmark 10-year yield rose to 1.602% in a session on Wednesday, it was still below its recent peak of 1.7% in October.

As investors increased their expectations that inflation will force the Fed into raising rates earlier and more quickly than anticipated, the Treasury market has been in turmoil over recent weeks. In the short term, rates rose and the yield curve flattened before partially declining.

The Fed’s ability to accurately forecast the taper has been generally appreciated by investors. This contrasts with 2013, when bond yields soared after Ben Bernanke, then Fed chief, unexpectedly said to lawmakers that the central bank might slow down its asset purchase pace.

Futures on federal funds rates, which are short-term rate predictions, were little changed on Wednesday. This continued to indicate that there will be two rate rises in the next year.

Investors still perceive a favorable investment environment despite tightening.

Jack Ablin is the chief investment officer of Cresset Wealth Advisors Palm Beach. He said that he feels comfortable with owning equities, despite having reservations over high valuations.

Ablin declared, “I think the economy’s strong enough to withstand tighter Fed.”