This article argues that investors need not fear a Fed rate rise. Much anxiety has built up amongst equity investors over how a rate hike might impact stocks. Low rates have been the building block of the several-year bull run and many are concerned a rate rise might hurt performance or spark a correction. However, this piece says that if history is anything to go by, a rate rise is nothing to fear. The piece shows that during three separate tightening cycles since 1979, on average, stocks have returned 2% over the six months following the first hike. Those numbers compare very favourably to performance in the six months following cuts, where stocks averaged 8.2% losses.
FINSUM: This article does a good job of assuaging fears over what might happen when rates rise. However, such points should be tempered by the fact that rates have remained at historic lows for many years, meaning this coming rate hike will signal a whole new era.
Source: Wall Street Journal
Bank of America Merrill Lynch sent a warning shot across the bow of investors yesterday when it published a note urging investors to buy more gold and hold cash because of the threat of a market reversal. Analysts at the firm say that the market is trapped in a “twilight zone” between the end of Fed QE and the raising of rates, and until the latter occurs, markets will continue to be plagued by volatility, flash crashes, “correlation breakdowns”, and mediocre returns. The bank argues that likely catalysts for a “cleansing drop in asset prices” would be “consumer, rates, A-shares, speculation, high yield”. The bank also pointed out two conundrums. Firstly, that investors say they are bullish, yet there is much cash sitting on the sidelines; and secondly, that the S&P was sitting near an all-time highs at the same time as data is showing that $100 bn has flowed out of equity funds, something that is atypical. Finally, the bank said that the summer months offer a “lose-lose” proposition for investors, as either the macro situation improves, leading to rate hike that will cause volatility, or, the macro situation does not improve, leading to earnings downgrades which “drag risk-assets lower”.
FINSUM: This is a very thought-provoking piece which highlights a number of key things to consider about the current state of markets. Stocks do seem headed for a correction, and this piece gives some insights as to how that might happen.
A very worrying survey has just been completed which shows that nearly every credit trader on the street predicts a sharp credit “correction” or “meltdown” to arrive any day. The study was completed by the International Capital Markets Association (ICMA) and participants said they thought the meltdown could be sparked by the ending of quantitative easing or geopolitical risks, or some combination of both. “While market cycles are nothing new, the common concern is that, largely because of regulation, financial markets have never been worse placed to deal with a sharp correction,” said the report. The report shows that major asset managers have, despite huge global liquidity, been seeking ever more illiquid credit products in an effort to beat benchmarks, raising the risks of a sharp correction. The report estimates US credit liquidity has declined by 70% since the Financial Crisis, with a comparable figure in Europe.
FINSUM: This is an eyebrow-raising report which can be taken one of two ways. Either you discount this in the belief that since everyone expects it, the market will not be side-swiped and the correction will either not occur, or be orderly. Or, you take this as a sign that every firm and trader on the street is ready to hit the panicked sell-button at a moment’s notice. Hope for the best, prepare for the worst?