Risk assets have had a rough year as the Federal Reserve (Fed) has begun aggressively raising interest rates to combat ever-rising inflation in the United States. A similar phenomenon occurred around the world as central banks sought to eradicate inflation at the expense of risk assets.
In addition, fears of a recession are causing portfolio managers to rethink and alter their portfolios, with analysts estimating a 60 percent chance that the U.S. will fall into a recession. Meanwhile, Satori Fund founder and portfolio manager Dan Niles joined CNBC’s Squawk Box on September 26 to discuss the markets.
Dan Niles believes that multiples in the tech sector are very high and that it is the “last step“before the markets see the real bottom.
“The multiples are very high in this sector, in particular. I think this is the last leg to let go, before we hit a final, real bottom, around the middle of next year, during a recession. And the Fed has stopped raising rates and may be starting to think about cutting rates. But we have to wait until the Fed has stopped raising rates, and we’re not there yet.”
The Economic Pain
With interest rate hikes, it feels like the Fed is hurting the economy, but on the other hand, throughout history, raising rates was a way to fight inflation while slowing economic growth.
In addition, when interest rates rise, market participants should increase the discount rate they use to determine the value of future cash flows or interest payments associated with a risky asset, such as stocks or bonds. If high rates and high inflation put pressure on future earnings, these assets should be valued lower.
Although inflation has come down from the 40-year highs reached this summer, it appears that there is still pain to be had before a “recovery” can occur. For investors not currently in the markets, analysts so far seem to be suggesting a waiting period.