While Fed rate hikes have been successful in deflating the stock bubble, it has been a burden sustained primarily by consumer stocks when the government should be looking at excessive energy profits and their outsized impact on inflation.
Key Points
As a function of the Fed’s rate hikes, 2022 was a bad year for stocks.
Despite the index’s decline, valuation metrics look reasonable currently and this suggests that the Fed’s actions have helped tame a bubble.
However, a look at sector performance reveals excessive energy company profits (translating into substantial stock outperformance) at a time when lower energy prices are badly needed to help tame inflation. A government policy to lower energy prices could provide more economic benefit (relative to interest rate hikes) while also balancing the unfair discrepancy between battered consumer discretionary stocks and inflated energy shares.
