The Fed has created a ‘Goldilocks’ environment that will push stocks higher, top HSBC investment strategist says

Federal Reserve coronavirus
The Fed has said strong inflation will prove transitory. Liu Jie/Xinhua/Getty Images
  • The Fed has created a “Goldilocks” scenario in which stocks should keep rising, Willem Sels said.
  • The HSBC Private Banking investment boss said inflation and rising bond yields should prove transitory.
  • He said he was seeking a balance between growth and value stocks as the recovery continues.
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The Federal Reserve has created a “Goldilocks” environment in which inflation should stay under control and stocks can keep rising, the chief investment officer at HSBC Private Banking and Wealth Management has said.

Willem Sels said he believed the Fed had struck the right balance between keeping monetary policy loose and signaling that it is keen to hold down inflation, after officials at the central bank brought forward their forecasts for when interest rates would rise.

“The scenario that some investors might have worried about, that because of the [Fed’s] average inflation target they would be slow to act, therefore that inflation would spiral out of control, that scenario is now much, much less likely,” Sels told Insider.

“So I think you have the almost Goldilocks scenario again, where you have a Fed that is not behind the curve, but that also doesn’t crush the recovery,” he said. A Goldilocks scenario is when things are “just right” – after the famous fairy tale.

Stocks fell sharply earlier in June when Fed official James Bullard told CNBC that stronger-than-anticipated inflation might mean the central bank has to raise interest rates as early as next year.

But since then, investors have pushed the benchmark S&P 500 back up to record highs. Meanwhile, bond yields have fallen as the market’s fears of strong inflation have receded.

Sels said he thinks strong inflation will be temporary and that the yield on the key 10-year US Treasury note won’t go much above 1.5%, supporting stocks, which tend to do better when yields are low.

He said there is “fundamentally a positive combination of low rates, low inflation, and a recovery.”

Sels said such an environment calls for a balance between so-called growth and value stocks. “The trade into small caps, the trade into value, has probably run its course to a large extent. But I don’t think you’re going to go all at once and make a complete U-turn.”