The renaming of Powell
It is no coincidence that the NASDAQ pullback came after Federal Reserve Chairman Jerome Powell was renowned to his position by the Biden government. A faster reduction in federal quantitative easing and an increase in interest rates by mid-2022 are now significantly more likely.
And that could be a problem for the NASDAQ composite. Many of its tech companies fuel their rapid growth with cheap debt. And with an interest rate hike close to the other side of the pond, the cost of debt will rise, which could see the hand brake applied to growth plans. And that would lead to increased volatility.
But Powell continuing in his role could also be good news in the long run. As a Republican, his reappointment demonstrates that Democrats are prepared to prioritize stability over partisan politics. And with the precarious economic situation, the markets will appreciate some certainty at the head of the central bank of the United States.
Additionally, this week’s drop can be attributed to several other factors as well. Inflation has climbed to 6.2%, as the labor crisis begins to affect productivity. And microchip shortages affect tech stocks much more than the rest of the market.
It is also possible that after such a long bullish period some investors will cash in on what they perceive to be the top of the market. They could reinvest in a less volatile index, like the S&P 500, which is made up of the 500 largest US companies by market capitalization. Or they could head to bank stocks which have historically performed well in inflationary and higher interest rate environments. JPMorgan, Wells Fargo, and Bank of America are all up this week.
The NASDAQ Composite Index could hit new highs as the crucial Christmas trading season approaches. But as monetary policy tightens over the next few months, many of its less well-established tech stocks could start to slow their growth. What do you think will happen next?
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