The post-pandemic boom has been extraordinary. Fortunes have been made in a wide range of asset classes as the markets defied the odds and kept on reaching ever-higher highs week after week. But none of this would have been possible without central bank stimulus, and no regulator has injected more liquidity than the US Federal Reserve. Now, after much deliberation and delay, the Fed’s hand has been forced by runaway inflation and, like many of its counterparts around the world, it too must begin to taper its economic support and adopt a more hawkish stance. But what will be the impact of this new direction on the instrument classes that have benefited so much from dovish central bank policy? What will be worst hit and how can investors protect their hard-earned money?
Out of stock(s)
The experts are more or less unanimous in their assessments: equities will most definitely feel the force of monetary tightening the most. Numerous forecasts predict a decline of 10-20% from current-year highs on the Big Three US indices (S&P 500, Nasdaq and Dow Jones), with some allowing for even deeper drops. Now, this doesn’t mean you should sell all your holdings right off the bat, but it would perhaps be wise to shift focus towards strong value stocks and consumer cyclicals like Coca Cola or P&G, for instance. There’s also always the option of short selling the indices or buying puts to take direct advantage of the expected declines in stocks, however this is a high-risk strategy best left to market veterans. For most, the best course of action would be a simple reduction of exposure to the most overvalued sectors – think tech and green energy – and a sizeable cash allocation for picking up bargains when prices drop.
Cash is king
In a world of rising inflation and low interest rates, you could be forgiven for saying this adage has had its day. However, once the Fed begins to scale back its asset purchasing and quantitative easing programmes, cash will become a much more attractive proposition. But not just any old fiat will do – you want dollars, the US variety to be precise. This is because large-scale investors around the world will begin to buy up US Treasury bonds as soon as rates increase, which will see the greenback rise against its major competitors around the world. You also have to look at things holistically: if you’re reducing your stocks allocation, you’ll need to put that money somewhere and nothing is more liquid than legal tender currency. But if you’d rather not own physical dollars, the US Dollar Index is a great option. However, as we touched upon above, having cash reserves is a must if you want to take advantage of lower equities prices post-correction. Thus, setting up pending buy orders at pre-determined percentage decline levels would be a wise move.
Gold and crypto
Although at two completely different ends of the spectrum – gold being the oldest defensive asset there is and crypto being a highly speculative and volatile new-age instrument – both are considered the only viable alternatives to fiat money and are thus liable to see increased interest in bearish times. As both the traditional inflation hedge and volatility protection, we can say with some certainty that gold will benefit from any stock market drops to come. Crypto is a different animal altogether, though, and it’s still difficult to predict how it will react to fiscal tightening. In 2020, during the last crisis, it appeared to correlate with stocks more than anything, declining significantly before exploding over the weeks and months that followed. Cryptocurrencies, Bitcoin in particular, are increasingly being touted as a digital alternative to gold and so we could see it correlate more with the yellow metal this time round, especially given the huge capital inflows from institutions that we have witnessed since the last crash. In any case, healthy diversification is always a good thing and any investor should have some exposure to both these instruments.
Where Libertex comes in
Whatever the weather on the financial markets, Libertex can help you get your piece of the action. Because we offer both long and short positions on a wide range of instruments and assets, you’re bound to find something you think is headed up or down in the near future. With everything from equities, indices and ETFs to Forex, gold and crypto, there really is something for everyone – and our generous leverage enables you to maximise your potential gains whatever your starting capital. What’s more, our multi-award-winning trading platform, which is available on desktop, iOS and Android, makes trading a breeze. You can set pending orders, view in-chart signals, and make trades all in one easy-to-use app. For more information or to create your very own Libertex account, visit www.libertex.org.
