Markets have 'knickers in a twist' over rate rise fears

Markets have 'knickers in a twist' over rate rise fears

The first three weeks of 2022 have been savage for growth stocks but opinion is divided about whether this week's Federal Reserve meeting will arrest the market turmoil.

Since the start of January, the Nasdaq has fallen 15 per cent, the S&P 500 crashing 10 per cent and the Dow Jones dropping 7.7 per cent.

The FTSE 100, seen as more value-orientated due to its large number of financial services firms and mining companies, has only lost 2.5 per cent since the start of the year.

This has raised questions over whether we are transitioning from a growth to a value cycle, or whether the trading in the first few weeks of the year has simply been due to anxiety over monetary policy.

Central banks around the world are struggling with the prospect of surging inflation and are considering whether to raise rates - which would be less favourable to growth-orientated companies.

The Fed is meeting tomorrow to set rates and is widely expected to signal that it will increase them.

Ben Yearsley, investment consultant at Fairview Investing, growth funds were still looking very attractively priced.

“The short term outlook is much more mixed and uncertain…but over the next decade growth will do very nicely for you,” he said.

“Even with a rate rise to 1 per cent, that’s still low on a long-term basis. So why is everyone getting their knickers in a twist?

“Yes it changes long-term discounted cash flow valuation, but you’re not talking 5 per cent rates here.”

For Laith Khalaf, head of investment analysis at AJ Bell, the Fed’s decision tomorrow was only part of the story.

“The meeting this week is one data point of many that the market is going to be stitching together and has been stitching together over the last few months,” he said.

Khalaf said as we transition from loose to tight monetary policy, he can see why we might have a continued rally in value stocks.

“Valuations in growth stocks are very high, and in an environment where interest rates are rising and the economy is doing quite well, there’s not so much of a premium that you would need to put on growth because it should be more plentiful.”

Mark Dampier, fund and market commentator, said investors were facing a fundamental shift from growth to value.

“We’ve had over 10 years of a bull market where interest rates have been low, even though everyone thought they were going to go up. So you’ve had ten years of growth stocks outperforming and it’s been amazing," he said.

“Is that likely to come to an end? Yes.”

However, there is one more value rally to go said Dampier.

“I think we still have one more leg to go in the bull market, and I only say that because there’s so much bearishness around today, especially in the last few weeks.”