Jerome Powell’s speech tanks markets. But, there is more pain to come
The key takeaways
Jerome Powell's 8 minute speech at Jackson Hole had major implications for markets: it sent the S&P 500 down over 3% and the Nasdaq composite down nearly 4%. It wiped $78 billion from the net worth of the wealthiest Americans. But, there is more pain to come.
Key takeaways from Powell’s Jackson Hole Speech
The Jackson Hole speech has severla key takeaways. But, in short, these all relate to the idea that interest rates will be higher for longer even if growth falls.
Powell reigned in talk of neutral rates: In July, Jerome Powell came under fire for indicating that rates had hit the ‘neutral’ range (i.e., the level of rates that is neither stimulatory nor contractionary). The main concern was that inflation was far above the long term average or the target range. Powell walked this back at Jackson Hole. He clarified that the long term neutral rate is not the same as the instantaneous one. He further asserted that rates could remain above long run neutral for some time.
A pivot is not imminent. Jerome Powell indicate that the Fed is unlikely to pivot significantly unless/until there is significant progress in inflation.
The fed will reduce inflation regardless of whether inflation is supply driven: Jerome Powell indicated that inflation in the US is below that of other markets. And, it might be due to supply factors. However, regardless, the Fed will try to reign in inflation even if this means significantly reducing aggregate demand.
Key investment implications
The main investment implication pertains to interest rates and inflation. Investors should look for the types of company that will be more likely to survive higher interest rates and inflation. Some factors to consider include:
Consider the firm’s balance sheet and liquidity ratios. Especially focus on firms that have strong liquidity and coverage ratios.
Scrutinize the firm’s future capital expenditure requirements and whether this might influence the firm’s ongoing viability.
Look at firms that have pricing power with respect to both customers and suppliers. This is especially the case in inflation sensitive industries.
Look for firms that have a defensible moat. This could be due to strong data, enterprise clients, or innovation.