Stocks may be at record highs, but growing concern over rising interest rates, inflation and the Federal Reserve's next move is keeping investors on edge.
Here's what experts are watching ahead of the Fed decision on Wednesday.
Jim Cramer, host of CNBC's "Mad Money," says it's still an investable market.
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"The money is coming here. And I just think that when I hear that I know there'll be people say, 'Wait a second, that is a bad sign' or they want to think the other side of the trade. But I listened to Scott Kirby this morning of United. I listened to these upgrades of the cruise lines and how they're able to raise rates, and I come back and say, 'You know what? It's a good time to invest, sorry!'"
Karen Firestone, chairman and CEO of Aureus Asset Management, breaks down the market disconnect.
"The market overall has pockets of very expensive stocks, and we've seen what happened with the group — that's Peloton, Zoom, Airbnb, DoorDash, Palantir. Those stocks have come down since the fall because they just got ahead of themselves, great companies but selling at high multiples of sales. So now we've had the reopening trade since September. And of course, airlines, hotels, casinos are going to have a big boom in business compared to what they had for the whole Covid year. That doesn't mean, though, that the stocks continue to go up forever. You hear so many people talk about their enthusiasm for the cyclical or value trade, but most of the sectors of the market are trading at around 23 or 24 times forward earnings. Now, if you look at industrials, which were very depressed last year, they're 24 times earnings. So, Cat[erpillar] and Deere sell at the same multiple as Facebook and Google, and the tech stocks are selling at 25 times next year earnings, and they have obviously some expensive names in there. So, you know, you can have a bit of a pause in the cyclicals, which we, in fact, saw with technology. The technology stocks peaked at the beginning of September, and they sort of went into this lull and they're still down, the big names are down from where they were in the fourth quarter. They had a tough quarter in the fourth. They've had a very tough year so far. They're up about 2%, and cyclical stocks are up anywhere from 8% to 20%."
Judy Shelton, author and economist, shares what the Fed can and can't do to rein in inflation.
"The reason people fear inflation now is they very rationally see that there's been a tremendous amount of liquidity injected into the system. And we've all learned that too much money chasing too few goods can cause inflation. The problem in thinking that it is a Phillips Curve trade-off is believing that if we get ahead of inflation then we have the tools to fight that. Well, the tools to fight that are to raise the interest rates paid on reserves or to keep buying even more, to interact more in credit markets, and so I don't think the Fed is going to start selling back anytime soon. I'm concerned if they hint that they can raise the rate on excess reserves, which are already at a record high at $3.6 trillion, that they are furthering this tendency of banks to be more interested in interacting with the Federal Reserve than private lending. And the way you get productive economic growth, the kind that actually increases the output of goods and services, is to encourage small business, that's where the jobs are. So I'm concerned the Fed is in a little bit of an untenable position in that they think by expressing a new tolerance for inflation, they're somehow helping the lower-wage workers, when in fact they're the ones hurt the most by inflation. And I think they're discouraging private lending which would be to have the banks quit piling up reserves at the Fed and to lend them into the real economy, then you would get real growth, the kind that raises wages without causing inflation."
Thomas Farley, chairman and CEO of Far Peak, warns on valuations and unrealistic projections.
"The thing I'm concerned about is seeing investors get hurt. And there have been some deals I look at and I just say this valuation is completely untethered from financial reality ... SPACS post-deal where they're putting out five-year projections of a pre-revenue business and the market somehow is valuing it on 2024-2025 revenue that may or may not materialize. And my concern is people will buy into that enthusiasm, and ultimately get hurt if the stocks come way off. So, that's my really only concern about SPACS is that exact sort of situation, really just selling a stock on hope and belief. I'd like to see sponsors feel a little more tethered to those projections, hold onto their stock holdings for those projections."