Central Banks Signal That It's Time to Be Selective
A dovish turn suggests that you look homeward, angel.
On Capitol Hill.
Photographer: Aaron P. Bernstein/Bloomberg
In his testimony to Congress on Tuesday and Wednesday, Chairman Jerome Powell confirmed that the Federal Reserve has undertaken a dramatic policy pivot, opening the door even wider for other central banks to also adopt more dovish stances.
The shift increases the risk that many on Wall Street could slip back into the comforting belief that renewed central bank support is sufficient to ensure another round of meaningful stock market rallies around the world. Already, the MSCI World Index has rebounded about 16 percent since its Dec. 24 low, and for understandable reasons. Going into last year, extraordinary liquidity injections and ultra-low interest rates had pushed up stocks dramatically. But investors shouldn’t view the recent monetary policy pivot as a green light for piling on risk assets as a whole. Instead, they should focus on three important qualifiers that favor domestically oriented U.S. securities, both stocks and bonds, and seeking greater credit quality and liquidity.