Displaying items by tag: fed

Last month, we wrote about a survey that revealed advisors are seeing the importance of active ETFs since owning passive index-only ETFs left them too exposed to market conditions. Another survey was performed this month showing similar results. VettaFi held a webcast called Active Strategies for Rising Rate Headwinds that featured Franco Ditri and Chris Murphy of T. Rowe Price and Todd Rosenbluth of VettaFi talking about the Fed’s monetary policy outlook and how financial advisors can incorporate active strategies into a bond portfolio. After the webcast, a poll was taken revealing that more advisors are seeing the need to add active management to their portfolios, given the likelihood that the Fed will continue to raise rates. The majority of respondents expect to increase their exposure to active ETF strategies, with 50% being “very likely” and 39% saying they are “somewhat likely.” Of those, 39% of respondents said they would most likely consider high-yield/bank loan funds for exposure, with 27% saying they would consider active short-term bond funds. In addition, 20% are contemplating core-plus and 14% are looking toward core bond funds. If the Fed continues its tightening policy, actively managed fixed-income strategies could help reduce risk.

Finsum:A post-webcast poll revealed that more advisors are seeing the importance of active fixed income with the Fed continuing to pursue a tight monetary policy.

If DataTrek Research is correct, we can’t expect a new bull market to commence until volatility declines. The research firm said that volatility isn’t expected to decline until two things happen. The first is the Federal Reserve stopping its interest rate hikes and the second is more clarity on corporate earnings expectations as we head into a potential recession next year. The firm believes that if investors can gauge those two factors, then they can capitalize on large stock market returns. They listed the S&P 500's 28% gain in 2003 after the dot-com bubble, the 26% gain in 2009 after the Financial Crisis, and the 61% surge from the COVID-19 low until the end of 2020 as examples. DataTrek co-founder Nicholas Colas stated, "For volatility to structurally decline and drive those high returns, investors need to have growing confidence they know how corporate earnings will develop. This means they must have a handle on monetary/fiscal policy." At present, investors are not sure about those factors. The Fed recently surprised the market when it indicated that it will likely raise rates by another 75 basis points next year and leave them higher for longer. In addition, analyst earnings estimates are all over the place.

Finsum:According to DataTrek Research, investors shouldn’t expect a new bull market in stocks until the Fed stops rising rates and there is more clarity on earnings expectations.

According to the Wall Street Journal, investor home buying has fallen 30% over the past year due to high prices and rising interest rates. The Journal cited Redfin data that showed companies bought 66,000 homes across 40 markets in the third quarter of 2022, a 29% drop from the 94,000 homes bought during the same period last year. The declines come after a two-year period in which investors piled into the US housing market as the demand for suburban properties rose. While investors were buying one in every five homes at the start of the year, a combination of rising rates and elevated prices is driving the slowdown. The Federal Reserve tightened rates from near zero in March to a current range of 3.75% to 4%, which pushed mortgage rates higher and curbed demand. The interest rate hikes were in response to escalating inflation. In addition, house prices have remained the same in many areas of the market despite the fall in sales.

Finsum:Investor homebuying dropped 30% year over year due to a combination of rising rates and high home prices.

JPMorgan’s Chief Market Strategist Marko Kolanovic is trimming risk exposure in the bank’s model portfolio due to uncertainty in central-bank policy and a rise in geopolitical tensions. It’s a notable move for one of the most bullish strategists this year. Kolanovic cut the size of the company’s equity-overweight allocations and bond-underweight allocations. Equity overweight is the expectation for stocks to outperform their peers, while bond underweight is the outlook for bonds to underperform their peers. In a research note on Monday, Kolanovic’s team wrote, “Recent developments on these fronts — namely, the increasingly hawkish rhetoric from central banks, and escalation of the war in Ukraine — are likely to delay the economic and market recovery.” This follows Kolanovic’s comment earlier this month that the company’s year-end S&P 500 target of 4,800 may not be realized. However, he is hoping that bearish sentiment could limit further declines, while Asian economic growth could help support a global recovery.

Finsum: Uncertainty in the Fed’s central-bank policy and a rise in geopolitical tensions led JPMorgan’s Chief Market Strategist to trim risk in the firm’s model portfolio.

According to an index that measures Treasury market volatility, bond volatility is at a level not seen since the peak of the COVID market crisis in March 2020. This is a worrisome sign that the Treasuries markets, which are considered a safe haven for investors, are not functioning as they should. For context, the biggest one-day move for the benchmark 10-year Treasury in 2021 was 0.16. This year, there have been seven days with larger moves. Liquidity is evaporating, which has caused the soaring volatility. A Bloomberg index is currently showing that liquidity in the Treasury markets is worse now than in the early days of the pandemic, while implied volatility, measured by the ICE BofA MOVE Index is near its highest since 2009. This is coming at a time when Bloomberg News reports that the largest buyers of Treasuries, including Japanese pensions, life insurers, foreign governments, and US commercial banks, are pulling back at the same time. Even Treasury Secretary Janet Yellen has expressed concern about a potential breakdown in trading, saying that her department is “worried about a loss of adequate liquidity” in the US government securities market.

Finsum: A lack of liquidity and a pullback in large-scale treasury purchases has triggered volatility not seen since March 2020.