Displaying items by tag: inflation
The bond market looks primed for a big correction, says a top asset manager. Bonds have been surging in price as yields fall because of fears over coronavirus, but they seem likely to have a sharp pullback once the news cycle focusing on the virus moves on. That is the argument coming out of asset manager WisdomTree. According to the firm’s head of Fixed Income Strategy, if we have a sharp “V” shaped recovery, then bonds might see yields jump sharply (and prices fall sharply).
FINSUM: WisdomTree made one other excellent point that is not as obvious. US companies are starting to seek alternative suppliers away from China. As this happens, there is likely to be a transitory pickup in inflation since prices are probably going to be higher from suppliers outside of China. Accordingly, bond markets might also react sharply to a rise in inflation.
It may not get much attention right now, but the biggest threat to stock prices is also the same thing that has been supporting them for years. If you really consider what has driven the extraordinary rise in stocks, it is the fact that bond yields have been so outrageously low since the Crisis. This has created the widely-covered “TINA” (there is no alternative) syndrome that has driven investors to pour capital into stocks. Accordingly, many analysts say the biggest risk to stocks is a pickup in inflation, which would likely send bond yields sharply higher.
FINSUM: This is a solid argument theoretically, but calling a rise in inflation has been a very poor bet for over a decade. Why is that different now?
If you think the economy is going to keep humming along, then buy small caps, as they look set to gain the most from that scenario, at least according to Leuthold group. Small caps look likely to benefit disproportionately from the rising inflation and higher appetite for risky assets that accompany a strong economy. That said, small caps have lagged large caps for the last decade, so there is some reason to be skeptical about this call. Accordingly, “If 2020 should prove difficult for earnings growth, we would expect large-caps to maintain their earnings growth superiority”.
FINSUM: We can see the economy continuing to roll, but we have a harder time seeing inflation jumping up. We think the status quo will continue.
Ban of America says it is a very good time for investors to buy TIPS, or Treasury Inflation-protected securities. The bank thinks inflation expectations are going to rise this year and they are bullish on long-dated TIPS. The call is notable as many fund managers lost money with similar bets after the Crisis, when many thought inflation would jump alongside QE. This time may be different as the Fed has explicitly said it would let inflation run hot to compensate for the slow inflation we have had for the last decade.
FINSUM: We just don’t see inflation rising much in the near term. There are still a lot of worries about the economy. We feel like 2019 would have been the year for big inflation worries/rises, but it didn’t materialize.
Investors may be a little hazy on how forthcoming Fed rate cuts might affect stocks. One kind of assumes they will be positive, but then again, rate cuts mean the economy is worsening, so the picture becomes a little hazy. Well, a pair of top research analysts have just weighed in on the question and say the market’s reaction is likely to be positive. The year after a second rate cut stocks generally rise strongly, with the Dow up an average of about 20% in the next one year. However, this only holds if it is not too late to hold off a recession. That said, the gains from a second cut have often been immediate, “Perhaps because the second cut demonstrates the Fed’s commitment, or perhaps because the liquidity from the first cut had begun to work through the system, the gains have been immediate, with an average jump of 9.7% three months after the second cut”, say analysts at Ned Davis Research.
FINSUM: As we have said recently, we think the market is re-entering a post-Crisis goldilocks phase consisting of an accommodative Fed and a not-too-weak economy, the combination of which is very supportive of asset prices.