Federal Reserve commentary sparks a relief recovery in tech stocks
Last week’s effort by the Federal Reserve to curb inflation by raising US rates by another 75 basis points will likely see inflation decline in 2023 and will likely tip the economy into recession. Wednesday’s rate rise increases the Fed Funds rate to between 2.25 per cent and 2.5 per cent. According to CBA economists, the year-end 2022 target sits between 3.75 per cent to 4.0 per cent. The Dow Jones Industrial Average and the NASDAQ Composite index rallied 1.4 per cent and 4.1 per cent respectively.
Tech stocks rallied on the back of Fed commentary which hinted that the pace of increases may slow and that the Fed wasn’t as hawkish as first thought. Investors were also encouraged after Fed chair Jerome Powell highlighted the fact that he didn’t believe the economy is currently in a recession.
Discussing the implications of the Fed’s decision, global bonds portfolio manager at Janus Henderson, Jason England, said, “As expected, the Fed hiked another 75bps which the market was pricing as they continue to front-load rate hikes to tame high inflation. The 150 bps (1.5 percentage points) of hikes over the past two meetings are the largest concentrated rate increases since the Volcker era in the early 1980s, which is another sign of how committed this Fed is to bringing inflation down to its 2 per cent target. The policy tone continues to lean hawkish with the Fed highly attentive to inflation risks, so it anticipates ongoing increases to the Fed Funds rate.”
Shares in Microsoft (NYSE:MSFT) were central to the post-rise strength, with the tech stalwart gaining more than 6 per cent after announcing that it expects double-digit sales growth in the upcoming year. This came after a slowing of quarterly sales, though the Azure Cloud platform saw another 46 per cent lift quarter on quarter, and a 33 per cent rise for the commercial business. It was a similar story with Alphabet (NYSE:GOOGL), with shares rising 7.7 per cent on strong revenue numbers. Meta Platforms closed up 6.6 per cent, ahead of its earnings; Amazon shares were up 5 per cent and Apple added 3.4 per cent.
England points at the Fed commentary as one of the reasons behind the tech rally. “The Fed will be less clear on guidance for future rate hikes, going to a meeting-by-meeting decision-making approach with the size of hikes dependent on incoming data. Chair Powell noted that this move is due to reaching the neutral level now of 2.25 per cent-2.50 per cent, yet he did emphasize that the destination for the policy rate is still consistent with the June Summary of Economic Projections (SEP),” England says.
“With the June SEP showing the Fed ending 2022 at a range of 3.25 per cent-3.50 per cent, the market pricing of a terminal rate of 3.30 per cent peaking in January 2023, then cuts priced in after that, is a little premature, as the Fed still has work to do on inflation.”
The Dow Jones has largely been in bear market territory, down 15.3 per cent, for the second half of 2022. Its lowest point was hit on 14 July, which has the market down 17 per cent since the start of the calendar year. From this point forward, things changed. From its lowest point, the market appears to have bounced back on hopes that inflation will start to ease back a lot earlier than first thought. While the Dow Jones has bounced back by 6.8 per cent, the NASDAQ has recorded a much larger bounce of 12.1 per cent, with much of this rally seen in the tech sector, driven by falling inflation expectations and a return of investor confidence. Better-than-expected quarterly earnings from the tech giants, together with the feeling that the worst is now past, have added to factors supporting the resurgence in growth stocks.