Displaying items by tag: correction
The Fed is beginning to talk tapering and that has sent treasury yields spiking to 3-month highs (since before delta was spreading rapidly). The treasury yield spike has sent Growth stocks, such as in the technology sector, tumbling. Investors caught in the middle have flocked to value stocks, such as energy and financials. These stocks have cyclical reopening qualities and investors are singing the same reflationary trade song from back in May. However, growth doesn’t look quite as sluggish, and this might keep these stocks rolling a bit longer. Supply side factors in energy in particular will keep value strong beyond interest rates falling or inflation being more than transitory.
FINSUM: Value needs this middle zone of moderate inflation and moderate growth. If either fall off or pick up too much it could push investors back into growth or push the whole market down!
Some of the biggest names on Wall Street have been calling for a correction recently. Morgan Stanley is chief among them. The bank’s chief equity strategist, Mike Wilson, says he thinks there will be a 10% correction in the near term. According to Wilson—who predicted the last two market sell-offs—we are in a mid-cycle transition phase of a market cycle, which is an environment where equities getting very choppy.
FINSUM: This makes a lot of sense, but feels a little too bearish for us. If earnings can hold up, and inflation continues to moderate, we don’t think a full correction will occur. Flat and/or choppy, fair, but not a full 10% fall from here.
Bank of America just put out a big warning that advisors need to pay attention to. The bank is warning that earnings growth could get “vaporized” across a couple of sectors. The reason why is tax hikes. BofA's Savita Subramanian posits that in a scenario where taxes rise to 25% next year (from 21% this year), 5% would be wiped off earnings growth, a huge margin in a year that is already set up to see some cooling after the red hot earnings growth of 2021.
FINSUM: Investors don’t seem to be adequately accounting for this risk. Despite the fact that Biden’s proposals will likely get watered down, there appears a high likelihood that taxes will rise next year.
When you say bond legend, only one name likely comes to mind (let’s leave Gundlach out of this for a minute): Bill Gross. And old Bill always has an opinion, and this week it is a very strong one: “bonds are trash”. Bill says that bonds are now in the investment garbage can because Fed tapering in the first half of 2022 will likely cause a rise in Treasury yields from 1.3% now to 2% next year, causing an overall loss of around 3% over the next 12 months. According to Gross, “Cash has been trash for a long time but there are now new contenders for the investment garbage can. Intermediate to long-term bond funds are in that trash receptacle for sure”.
FINSUM: This is logically sound, but the timing is entirely dependent on the Fed.
While most banks try to stay bullish on market, Bank of America just couldn’t help but get gloomy this week, very gloomy. The bank says that record high prices and placid volatility mean a big correction looms. They believe the market is underpricing the risk of a Fed policy change, and when that comes, it will hit like a hammer. They even gave a name to these bouts of volatility/correction: “fragility shocks”. According to the bank, “We believe the US equity market is underpricing the risks of a looming tapering cycle. After all, the equity market has feasted on record monetary support post-COVID, and the Fed's outlook remains impaired by the extreme uncertainty in the macro forecasts on which they base their decisions”.
FINSUM: This unfortunately makes quite good sense. However, the opposing force here is that the buy-the-dip mentality is strong right now, which could provide support in any short-term sell-off.