The Federal Reserve decided to maintain the current interest rate within the 5.25 – 5.50% range on September 20, despite inflation exceeding expected forecasts in August. The decision suggests the Fed is relying on the lag effect of previous hikes rather than risking further destabilization of the banking sector, as reported on Wednesday.
Fed Chair, Jerome Powell, hinted at a possible soft landing during last week's press conference but refrained from calling it probable. This cautious stance reflects historical instances where soft landings were anticipated but failed to materialize during the three recessions of the last 40 years.
Adding to the uncertainty, household savings have depleted to pre-lockdown levels of March 2020, according to Bloomberg. Prior to a new hiking cycle in March 2022, the federal funds rate was in the 0.00 – 0.25% range, setting up a potential hard landing scenario for the economy.
In this environment, investors are turning their attention to value stocks. These represent companies trading below their intrinsic value and are typically well-established with solid fundamentals. Stocks like Proctor & Gamble (NYSE:PG) and Taiwan Semiconductor (NYSE:TSM) are considered value stocks due to their modest valuations and lower risk during a hard landing scenario.
Rob Arnott, founder of Research Affiliates, noted a resurgence in value investments as inflation expectations and AI hype subsided in H1 2023. The latest surge in the 10-year Treasury yield to 4.55%, its highest level since October 2007, suggests that investors are preparing for a rebalancing towards discounted value stocks.
On Wednesday, Wall Street showed signs of stabilizing after a sharp September decline. The Standard & Poor’s 500 was up by 0.3% in early trading, while the Dow Jones industrial average rose less than 0.1%. The Nasdaq composite was also up by 0.5%.
The bond market showed signs of easing pressure, with the yield on the 10-year Treasury pulling back to 4.52% from 4.55% late Tuesday. Despite this, strategists at Bank of America predict yields could continue to rise even if the Fed holds its overnight interest rate steady.
Despite the potential for a hard landing and other economic concerns, including a potential U.S. government shutdown, the overall economy remains solid, according to a report on Wednesday. This report revealed stronger orders for long-lasting manufactured goods last month than economists had expected.
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