Pitcher Partners’ David Lane has cautioned that a the US Federal Reserve has changed its tone on inflation and borrowing costs, and that could spell a correction for equities markets.
“While we were not surprised to see that the US Federal Reserve has increased official cash rates, we were surprised about the change in tone of commentary and outlook,” said David Lane, Wealth Management Director at Pitcher Partners Brisbane.
“The Fed now has concerns about rising inflation, and has signalled an escalation of borrowing costs.
“We are now expecting three rate rises of a quarter of a percent.
“While the underlying economic reasons for the change in tone are positive – the US economy is growing – the latest change is likely to be seen as a negative for equities markets in the short term.
“Investors had become somewhat comfortable with the subdued rate outlook.
“Now that the Fed is firmly in rate rise mode, this will challenge equities valuations.”
David Lane pointed to last January’s rate rises as an indicator of what US markets could be in for.
“We have been cautious about the recent rally in the US and Australian share markets, and today’s announcement could be the catalyst for a correction over the coming months. Last January was a terrible time for markets, following the Fed’s last rate rise.
“With a dearth of activity as the world awaits the inauguration of Trump, there’s a high likelihood of a weakness in markets.
“There are opportunities to take profits on positions that have rallied strongly, particularly in the resources market where many stocks have rallied above realistic levels.
“We would, however, view any weakness over the coming weeks as being an opportunity for adding to long-term portfolios.”
