Inflationary forces have led central banks to rethink monetary policy. According to Peter Hardy, senior client portfolio manager with American Century Investments in Kansas City, Mo., the end of easy money will lead to more volatility. 

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“The returns for stocks beyond the intermediate future is hazy,” said Hardy in a Jan. 31 interview.

U.S. inflation is at its highest rate since the 1980s, with  increases in wages, rents, cost inputs due to supply chain pressures, commodities and basically every price measure, Hardy said.

This has led the Federal Reserve to signal that it will raise its benchmark interest rate as soon as March, a key step in reversing its pandemic-era low-rate policies that have fueled hiring and growth but also contributed to inflation. Some analysts are even calling for a 50-basis-point hike next month.

The change in policy has caused stock markets to sell off, Hardy said, “as we go from an environment where money is looking for a home to an environment where money is being removed from the system.” 

Volatility will continue throughout this process, he said, but what happens next is harder to predict. 

“Can economic growth remain solid in the midst of this normalization?” he asked. “Do inflationary forces moderate in the second half of the year based on the change in monetary tack? Are there unanticipated consequences worldwide like we’ve already seen with Evergrande in China?”

Hardy’s short answer to these questions is to expect more volatility. And while U.S. markets have been hardest in this year’s sell-off, they typically become a safe haven for investors during volatile periods.

“So beyond the intermediate future, the next year or so, I would anticipate U.S. stocks to benefit versus the rest of the world,” Hardy said. 

In general, Hardy said the sell-offs this year have seen a repositioning from risk assets to less risky assets. Value has outperformend growth, but more importantly, he said, quality value stocks have been the beneficiary versus low-quality value stocks.

“Many of these stocks have attractive relative valuations and have been disregarded by investors,” he said.

“As the market redefines the discount rate — where interest rates normalize, where monetary policy ultimately ends — you should continue seeing value stocks and quality value stocks outperform,” Hardy said.

But, he added, but market volatility will continue.

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