Kevin O’Leary, a billionaire investor, claims that volatility is returning and that now would be a good time to buy more equities.
The chairman of O’Shares Investments said on CNBC’s “Street Signs Asia” on Wednesday, “It’s very disheartening to equity markets to lose close to 1,000 points in a matter of 40 minutes.”
“That means volatility is back. If you’re an investor, maybe the best thing to do here is — since you can’t guess the bottom — is to take opportunities on days like today and buy stocks that you think are attractive.”
His remarks were made shortly after the U.S. consumer price index report revealed that despite a fall in gas costs, August inflation was hotter than anticipated. As investors prepare for additional rate increases from the U.S., stocks plummeted broadly, with the Dow losing 1,200 points on its worst day since June 2020. Federal Reserve will assist in limiting rising costs.
“It was assumed only 48 hours ago that the Fed’s terminal rate would be 4%. And that would be the maximum in terms of rate hikes, but we’re past that now,” O’Leary used the term “end rate,” which is the point at which it is anticipated that the U.S. central bank will stop raising interest rates.
“There’s a bet going on in the market, you can see it as volatility. In fact, it may be significantly higher than 4%,” in his statement, he predicted that the Fed would most likely raise rates by at least 75 basis points, and probably by the entire percentage point. The central bank will raise rates by 100 basis points next week, according to Nomura, who shares his view.
“That level of uncertainty in terms of terminal rates, where the Fed will stop raising, is now officially an unknown. And so that’s extremely problematic for the markets,” the venture capitalist said.
According to a study released on Tuesday by the Bureau of Labor Statistics, inflation increased more than anticipated in August as rising housing and food prices partially offset the drop in gas prices.
The CPI, which analyzes changes in prices across a wide range of goods and services, increased 0.1% for the month and 8.3% from a year ago. With volatile energy and food prices excluded, the CPI increased in August by 0.6% from July and 6.3% from the same month last year.
The economy is still solid
The majority of the economy, according to O’Leary, is still doing well, and the Fed will keep raising rates until they observe “some kind of slowdown.”
“The consumer economy, which is 65% of the economy, still remains strong. Employment rates still remains strong,” he said. “And what we need to see is that slowing.”
In August, the food index increased by 0.8%, while housing prices, which account for nearly one-third of the CPI’s weighting, increased by 0.7%. For the month, energy prices decreased by 5%; however, the aforementioned increases more than compensated the decreases.
O’Leary continued by saying that the market had surged for the previous three sessions in anticipation of an inflationary slowdown, but that had not materialized.
“Nothing else [aside from gasoline prices] slowed down… Everything else continued to rise. And so we’re in a very difficult situation here,” he said.
“We gave up an entire three days of gains in about 11 minutes of trading right out of the gate this morning.”
Low housing prices
The recent CPI statistics did not, however, reflect the decline in house prices, and the possibility of the Fed overshooting still exists, he noted.
Since housing makes up a significant portion of inflation statistics, it takes the CPI 16 to 18 months to represent housing data appropriately.
“The way the Fed is calculating inflation is that the change in housing prices which has started to drop, is not reflected in the CPI data,” he said.
“This really means that there’s some risks that the Fed overshoots.”