(Bloomberg) — Stocks are falling and bond yields are rising, but markets still don’t seem convinced that the Federal Reserve will follow through on plans to continue raising interest rates until inflation is under control, said Sonal Desai, chief investment officer. for fixed income at Franklin Templeton Cos.
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“The Fed has no credibility,” Desai said on Bloomberg Television’s “Wall Street Week” on Friday. “Markets don’t believe the Fed is going to do what the Fed keeps saying it’s going to do.”
The S&P 500 closed 3.3 percent lower this week — its third straight weekly decline — after Fed Chairman Jerome Powell on Aug. 26 called for further rate hikes even if it brought “pain” to businesses and households. The index rose briefly on Friday after a Labor Department report showed the jobless rate rose despite adding 315,000 nonfarm payroll jobs in August.
The two-year Treasury yield hit its highest level since 2007 on Thursday before retreating to end the week little changed on Friday.
To regain confidence, the Federal Reserve needs to forecast even higher future interest rates and higher unemployment to shatter investors’ expectations of the central bank’s interest rate policy, which has continued since the 2008 Wall Street financial crisis. , Desai told “Wall Street Week” guest hosts Caroline Hyde and Matt Miller.
“You’re going to see volatility as the markets internalize what the different central banks are going to do,” Desai said. “Anyone who thought the way out would be easy is dreaming.”
Although there is more pain ahead, investors should look for stocks that have been discounted enough to be profitable, according to Ellen Lee, portfolio manager for Causeway Capital Management LLC. She recommended Royal Philips NV and Alstom SA, two European industrial companies that have fallen more than 40% in the past 12 months.
“Both are restructuring stories,” Lee said. “In the current environment, when interest rates are rising, that’s a good tailwind for value stocks. More importantly, they are in control of their destiny where leadership can lead them out of the situation they are in.
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