Aggressive monetary tightening by US Fed could pose headwinds: Wells Fargo

Inflation remains a core worry across the globe as crude prices remain volatile and central banks zero in on an interest rate hike cycle that would best suit the economy. Gary Schlossberg, Global Strategist, Wells Fargo Investment Institute, on Friday, said that central banks all over the globe will be tightening the policy over the next year, however, what will be varying will be the speed at which they do so. He added that more supply shocks are resulting in higher inflation.

He said, “Central banks generally will be tightening up on monetary policy over the next year. They will vary the speed; clearly, the Federal Reserve some of the other Anglo central banks- the Bank of England, Reserve Bank of Australia, are inclined to move a little bit earlier, Bank of Canada, European Central Bank later."

"Our guess is that the Reserve Bank of India (RBI) will keep its powder dry, at least for now realizing that these are more supply shocks that are driving inflation higher. And so, we will see varying speeds and that will create a certain amount of volatility in the foreign exchange markets,” he mentioned.

Schlossberg cautioned that aggressive tightening by the US Fed could pose headwinds. He, however, expects the US economy to keep growing.

He said, “If the economy slides into a recession, and we fully appreciate the risks out there, the supply chain disruptions from Ukraine, the war in Ukraine, very aggressive tightening by the Federal Reserve down the road certainly can create imposing headwinds for the market. "

"But we think that as I said, some of the positives out there should keep the economy growing at a modest rate, but still keep the economy growing; we think that will allow the market to move ahead, certainly not in a straight line. There will be volatility, but modest gains in the market between now and the end of the year on the net,” he explained.

On the S&P500, he has a target of 4,800 by the end of the year, he mentioned. “Our year-end target is a little bit higher than what we saw a month or so back, for the S&P 500. We still think that earnings will be an important driver of the market even though PE multiples will not be expanding nearly the way they did last year."

"In fact, they could even be compressed a bit further as interest rates resume a gradual rise, but we think that earnings growth will be enough to move the market higher and I think we have a target of about 4,800 on the S&P 500- it may be coming down a bit, but still a bit higher than what we saw at its most recent peak,” said Schlossberg.

Watch the video for the full interview.