The slump in stocks has a silver lining – it shows investors have finally stopped fighting the Fed, BIS says
- Stock prices declined this month as markets started pricing in more aggressive Federal Reserve tightening.
- But that's not necessarily bad news for investors, according to the Bank of International Settlements.
Investors shouldn't fret too much about the recent stock market decline – because it's a sign that markets have finally stopped fighting the Federal Reserve and other central banks, according to the Bank for International Settlements.
Claudio Borio, who heads up the financial institution's monetary and economic department, said in a media briefing accompanying BIS's latest quarterly review that this month's sell-off reduces the risk of a later crash.
"The longer market participants delay acknowledging the tightening stance of central banks, the higher the likelihood that buoyant valuations would keep supporting inflationary pressures, and therefore that at some point we would see an abrupt financial repricing," he said.
"That's the reason that the narrowing of the gap between central banks and markets is welcome," Borio added.
Stocks enjoyed a short-lived rally at the start of 2023 but that has fizzled out this month.
The benchmark S&P 500 and the tech-heavy Nasdaq Composite have each slipped around 3% in February, with better-than-expected jobs numbers fueling traders' fears that the Fed will have to raise interest rates above 5% and then keep them there for the rest of 2023 to curb soaring prices.
When borrowing costs rise, stocks tend to fall because the decline in their future cash flows chips away at their valuations.
But the recent stock slump isn't necessarily bad news for investors, according to Borio – who said that stocks' February struggles suggest investors are finally aligning their expectations with the hawkish Fed, reducing the risk of a surprise rate hike triggering a stock market crash.
"The sanguine attitude of investors contrasted sharply with the cautious tone of policymakers," he said. "Central banks gave no indication that monetary easing was on the horizon."
"In early February, renewed evidence of strong labor market conditions and solid growth nudged investors to bring their views more in line with central banks," he added.