Good morning.
Global stocks are having a rough morning, as a risk-off cloud hangs over equities. COVID jitters are sinking European stocks while U.S. futures are under pressure following yesterday’s sell-off. Watch bond yields. They’re ticking up again and that could weigh on tech stocks.
There’s no relief in crypto either. The price board is a sea of red.
In today’s essay, I take a closer look at Monday’s big news—Jerome Powell winning the Fed Chair sweepstakes—and what it could mean for your portfolio in the year ahead. (To be clear, Powell still faces a tough grilling before the progressive wing of the Senate, but he will almost certainly land enough votes to serve another four-year term).
Before we get into that, let’s see what else is moving markets.
Markets update
Asia
- The Asian markets were mixed with the Shanghai Composite, the best of the bunch, up 0.2%. Japan is closed for a holiday.
- Alibaba‘s October rally is a distant memory. The e-commerce high-flier fell a further 3% in Hong Kong as analysts continue to cut their price targets. The stock is down roughly 50% in the past 12 months.
Europe
- The European bourses sunk out of the gates. The benchmark Stoxx Europe 600 was off nearly 1.4% an hour into the trading day with just about every sector in the red.
- The U.S. Centers for Disease Control and Prevention updated its COVID travel advisories yesterday, putting virtually every EU country and the United Kingdom on its should-not-travel-there list. The British pound is lower versus the dollar, and the euro is flat this morning.
- The COVID situation isn’t likely to distract the ECB from its 2022 tapering plans. A Governing Council member yesterday said the central bank is “serious” about ending its pandemic-triggered emergency bond-buying program in March.
U.S.
- U.S. futures are in the red, but off their lows. On Monday, stocks dipped in the last half-hour; only the blue-chip Dow Jones Industrial Average finished in the green.
- The Powell pop proved short-lived yesterday. Just ahead of the opening bell, word leaked from Washington that President Joe Biden had re-nominated Jerome Powell to head up the Federal Reserve Bank for a new four-year term. Tech, consumer discretionary and communications services stocks dipped on the news.
- Energy stocks (+1.8%) were the big winner yesterday despite reports that the U.S. will work in tandem with China, India, Japan and South Korea to release strategic reserves of petroleum to ease gas prices. OPEC+ is no fan of the plan.
Elsewhere
- After a tough Monday, gold is down again. It trades below $1,800/ounce.
- The dollar is down.
- Crude is off with Brent hovering below $79/barrel this morning.
- Crypto continues to slump. Bitcoin trades around $56,000 while Ether nearly plunged below $4,000 overnight.
***
A jolt of continuity
It feels as if we’ve hit yet another inflection point in the markets. The big Powell nomination news wouldn’t go down as a shocker, but it still sent ripples through the markets that continue this morning. On cue, bond yields jumped on Monday, as did the safe-haven dollar. The latter hit a one-year high on Monday. Meanwhile, tech stocks tumbled; Nasdaq futures lead the way lower this morning.
Those moves reveal what the market expects going into the new year. “In response to the decision, investors moved to bring forward their timing of the initial rate hike from the Fed, with one now just about priced by the time of their June, 2022 meeting,” wrote Deutsche Bank strategist Jim Reid in an investor note this morning.
BofA Securities economist Michelle Meyer concurs. “Overall, the Powell re-nomination suggests a market that is likely to price in a steeper path of rate hikes & increased focus on the path of taper in the months ahead. The Powell re-nomination re-affirms our confidence for higher U.S. rates, a flatter U.S. rate curve, and higher future real rates,” she writes.
The markets are now pricing in as many as three rate-hikes next year. Rising interest rates should be welcome news to investors holding value stocks (mainly bank stocks). It will be a tougher road ahead for growth stocks (mainly, loss-making tech firms). The rule of thumb: investor risk-appetite tends to go down as rates climb.
It could be even tougher for the high-growth stocks should central bankers find that inflation, running hot today, takes off in the new year, forcing the Fed to speed up its tapering/tightening cycle. That concern is getting a lot more attention these days. As Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, said yesterday, “the stock and bond markets have largely been taking the inflation threats in stride, but we are more worried than the consensus, and believe inflation is a risk worth preparing for, and one that can damage those portfolios which don’t have inflation protection, or are at least inflation-resistant.”
Investors should treat a more hawkish Fed as a headwind going into 2022, but they shouldn’t do anything radical to their portfolio, investment pros advise.
Goldman Sachs released an investor note yesterday saying the firm remains overweight on equities and underweight bonds in the year ahead. For example, they like U.S. firms with low labor costs and European renewables specialists and banks, arguing the latter is undervalued. But they expect returns will be far harder to come by in the year-ahead.
Christian Mueller-Glissmann, a Goldman senior strategist, writes, “we expect returns for risky assets to flatten out in 2022, and headwinds to increase throughout the year as the macro backdrop worsens with weaker growth and upward pressure on longer-dated real yields.”
Assuming Powell is re-confirmed, you can bank on this one thing, Wall Street is saying: rate hikes are coming.
***
Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com
As always, you can write to bullsheet@fortune.com or reply to this email with suggestions and feedback.
Today's reads
Million-dollar homes will be the nationwide norm sooner than you think—Fortune
Jamie Dimon warns a woman is no shoo-in to replace him as JPMorgan Chase CEO—Fortune
Jerome Powell Will Face a Very Different Economy in a Second Term—Wall Street Journal
Market candy
Quote of the day
Powell’s critics have drawn attention to his stances on climate change, racial inequality, and bank rules. But what has gotten less attention is Powell’s career inside the Wall Street debt machine that is at the center of the Fed’s most controversial policies.
That's Christoper Leonard, the New York Times best-selling author. His forthcoming book is THE LORDS OF EASY MONEY: How the Federal Reserve Broke the American Economy. On Fortune.com, we carry a timely and riveting excerpt from the book. You can read it here.
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