The benchmark S&P/ASX 200 Index (ASX: XJO) is trading up by 29.9 points at the time of writing and now sits at 7,371.
Brent Crude futures, having charged 18% higher in the five days to Tuesday, have pared back those gains. Brent Crude oil is now trading at US$114 per barrel at the time of writing.
Meantime, gold, the world's safe-haven asset, is once again testing the US$1,918/t.oz mark having bounced from this level three times since 15 March.
In fact, whilst most commodity markets are taking a backward step today, equity indexes are powering on, as investors digest the latest macro-economic tidal wave of events overnight.
Matching the selloff in commodities is a rapid selloff in the bond markets overnight, particularly out of the US. As Bloomberg reports, this is seeing the 10-year yield spike to nearly 2.4%.
The US Fed has committed to raising base rates throughout 2022. Many brokers are adamant the pace of rate hikes will be quite fast for the Fed to "stay ahead of the curve", as they say on Wall Street. This means employing interest rate rises in a bid to combat inflation and prevent a recession.
Language used by Fed chairman Jerome Powell was interpreted to be hawkish. This prompted UBS analyst Paul Donovan to say there is a "possibility (not the certainty) of deliberately pushing [economic] growth below trend".
He went on to say that, with these moves, "recession risks come in". He also asserted "the global economy has significant structural change, and US economic data is notably less reliable today".
"Delicately positioning the US economy below trend, but above recession, would be harder than in the past," he added.
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What does this mean for shares?
Judging by the market's response, the news appears to be good and investors have responded by rapidly selling bonds and are pouring inflows into stocks instead.
Bloomberg contributor Mohamed El-Erian said on Bloomberg Television yesterday that stocks are "more resilient" but he isn't surprised, despite the Fed raising base rates for the first time in 3 years.
Co-founder and Portfolio Manager at Montaka Global Investments Chris Demasi agrees with the sentiment and urges that investors remember his firm's key message: "compounding capital over the long-term".
"That means staying the course and holding long-term winners and using the current near-term stock price weakness to buy the world's best companies that have outstanding opportunities," the portfolio manager wrote on Livewire.
Looking ahead, Demasi says equities look to offer the best return potential this year, especially given many individual stock prices have retreated.
"The MSCI [world index] and S&P500 trade at 18x and 20x respectively, down from 20x and 23x at the end of last year," he said.
"In return terms, that's an extra percentage point of current earnings yield," the expert went on to say. "At the same time, long-term interest rates are only up one-tenth of a percentage point.
"So, the spread between interest rates and the return from owning equities has increased."
Where to find the best bargains?
Demasi notes there is potential value in the mega-cap tech space on global exchanges, particularly in US names like Microsoft Corporation (NASDAQ: MSFT) for instance.
The company is now trading at around 30x post-tax earnings, he said, "where it was almost three years ago". But despite the sharp pullback in 2022, Montaka Investments' game plan remains unchanged.
It is aiming to stick with global equities in order to "reap their long-term rewards", Demasi says, preferring to adopt the mantra of 'time in the market' versus 'timing the market'.
"Playing a long-term game is easier if you are holding businesses winning from durable transformations with valuations that don't reflect that potential."
If the correlation between a hike in rates and the spike in equities is anything to go by, then Goldman Sachs says that May and June might be key inflection points for stock markets.
"The shift in wording from 'steadily' to 'expeditiously' today strikes us as significant, and changes in Fed communication like this usually happen for a reason," Goldman's chief economist Jan Hatzius said in a recent note.
Goldman now predicts two 50 basis point hikes in both May and June, followed by four 25 basis point jumps for the remainder of 2022.
A word of caution from other experts
The bullish sentiment isn't shared equally amongst all experts, however. Mohammed El-Erian also told Bloomberg TV that investors might be overlooking the prospects of a global recession by blindly investing in stocks.
"My baseline, for what it's worth," he stated, "is we're going to see a global stagflation, lower growth, higher inflation."
"The equity market hasn't quite priced that in yet because it's still thinking in a relative space," he opined.
Chief investment officer at Union Bancaire Privee Norman Villamin also told Bloomberg that "a high volatility regime should remain in place in the months ahead as the situation remains fluid on the geopolitical and economic front".
Moreover, not all pockets of the market are soaring at the time of speaking. Those shares tied to commodity baskets are taking a hit with the S&P/ASX 300 Metals & Mining Index (XMM) down more than 1% at the time of writing. It is the financials sector leading gains today.
