Market Update – 6/18/2021
The Federal Reserve held its target range for interest rates steady at 0% to 0.25%, but said it will probably increase it by the end of 2023 to 0.6%. The hike will come sooner than the Fed had expected in March, mostly because of a faster pandemic recovery, vaccination uptake and soaring domestic inflation. The hike caused the stock market to fall, the U.S. dollar rose, commodities and gold fell.
Since 2012, the Federal Open Market Committee announces the expectations of 18 members on the future federal funds rate after the meeting, which is called dot plot. The median dot plot for 2023 moved to 0.60% from effectively zero, and more members expect interest rates to rise in 2022. However, past records show that the dot plot itself cannot be used to determine that the Federal Reserve will raise interest rates.
The impact of expected interest rate hikes on the overall market is limited for now. On Wednesday and Thursday, the S&P 500 recovered most of the loss after a relatively large decline. The fact that the Nasdaq Composite Index, which is dominated by technology stocks, outperformed the S&P 500 and The Dow Jones Industrial Average showed that cash has flowed to high-growth or even speculative stocks.
We still believe that the current stock market is deviated from the fundamentals, but historical experience tells us that the stock market can be deviated from the fundamentals for a long time while no one knows when it will reverse. It is recommended to buy & hold and avoid high speculations names.
The U.S. dollar has risen under conditions of expected interest rate hikes and more turbulence in stock market. We continue to be optimistic about the trend of the U.S. dollar in the coming year. Although gold has fallen rapidly due to the news of expected interest rate hikes, there will be a ideal entry point in the short term with the mid- to long-term upward trend.
China has ordered state-owned enterprises to limit their exposure to overseas commodities markets as the country steps up its campaign to rein in speculation. Authorities also announced they will soon release zinc, copper, and aluminum from the secretive national stockpile. It is the first release of reserves in years, with the announcement causing a drop in metal prices in London and Shanghai, and a selloff in mining shares in Australia. China’s move comes as many parts of the commodity market that had surged recently are already starting to cool.
