Investors need to prepare for a 10% market correction over the coming month, as they make sense of the Federal Reserve’s position on interest rates.
The U.S. central bank is due to announce it will start to reduce its $120 billion monthly bond purchases on Wednesday, and the real story for the markets is how the Fed will talk about inflation.
Inflation is becoming a much larger issue than the majority of analysts had forecast, so investors will be focusing on fighting the trend of rising prices by starting to raise interest rates.
It’s highly improbable that the Federal Reserve will use their previous ‘transitory’ phrase to describe the current price surges. Inflation appears to be far stickier than expected.
Therefore, they will likely have to hike interest rates quicker and/or more aggressively, so markets are pricing in two or three rate hikes next year, which could result in a 5 to 10% market adjustment over the next month.
Naturally, all markets are subject to bouts of volatility, and the best way to manage this is with a well-diversified portfolio. A good fund manager will help investors to take advantage of the opportunities that come from volatility and mitigate potential risks as and when they arise.
Global central banks that introduced massive emergency support to fight the pandemic are now planning a move in the other direction.
A potential market correction will be viewed by savvy investors as the first major step towards a return to normal monetary policy and they will be looking out for the inherent opportunities that will come about.
Nigel Green is CEO and founder of deVere Group, one of the world’s largest independent financial advisory and fintech organisations.