Possible bottom for market, Ed Yardeni disagrees until inflation peaks

The markets have been on a wild ride over the past couple of weeks. However, the selling has made the S&P 500 go into a bear market.

Ed Yardeni, a Wall Street veteran, said that he doesn't think the markets have hit bottom yet. He said there is a lot of doubt about the sustainability of the current market.

According to Yardeni, investors have learned to stop fighting the Federal Reserve. Instead, they should align their investments with the policies of the US central bank.

For a long time, Yardeni urged investors to avoid fighting the Fed because it was expected to be easy on monetary policy. However, this idea has changed. Instead, they should focus on fighting inflation, not the central bank.

"For many years, the idea of don't fight the Fed was if the Fed was going to be easy [on monetary policy.] You want to be long equities," said Yardeni. "But what changed dramatically this year is 'don't fight the Fed' now means don't fight the Fed when it's fighting inflation. And that means that that's not a good environment for equities on a short-term basis."

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Market should not panic

The Fed raised interest rates by 75 basis points last week for the first time in almost two decades due to the rising inflation. It signaled that the Fed will continue to tighten monetary policy. According to Jerome Powell, the central bank will likely increase the rate by another 75 basis points at its next meeting in July.

The rising inflation and the Fed's continued policy actions have raised the risk of stagflation when the economy grows slower than before. The S&P 500 has lost 10 of its last 11 sessions and is now in a bear market. The Dow Jones Industrial Average dropped below 30,000 for the first time in over a year. All of the sectors of the S&P 500 closed more than 10% below their previous highs.

According to Yardeni, inflation will continue to rise until there are signs that the prices of food and energy have peaked. Market observers blame the rising prices on the Fed's fiscal stimulus measures, which were carried out in response to the COVID-19 pandemic.

Yardeni predicted that inflation will eventually reach a peak before the market can start to recover. He also said that it could happen next year.

Despite the recent market volatility, Yardeni said that the markets are at an exhaustion stage. He also mentioned that long-term investors can still find great opportunities in the current situation.

Recession risk

The increasing number of doubts about the Fed's ability to achieve a soft landing has raised the possibility of a recession. A bear market is often one factor that transpires before a recession.

Economists believe a recession will hit the rich harder than the average person. Mark Jolley of CCB International Securities said that the rich will feel the effects of the recession for a long time.

According to Jolley, the combined decline in the equity and bond markets has already caused the worst year-to-date loss in wealth since 1938.

Jolley also said that the rising interest rates will cause the value of people's assets to fall. Moreover, he noted that mortgages are at risk.

"Anything in the economy that is leveraged and long, which is basically private equity, your collateral has gone down 20%," Jolley said. "Imagine what would happen to the banking system in any economy if your house prices fell by 20%."