Below we publish The monthly point the care of Michele De Michelis, Investment Manager of Frame Asset Management.
The world‘s central banks are preparing to remove the enormous monetary stimuli placed on the market so much so that i futures dei fed funds already show three hikes of twenty-five basis points for 2022 and another seven between 2023 and 2024.
Going back to the stock market rally, if we want to be picky, looking at the graphs we see that the rise was generated above all in the first eight months of the year, after which we moved into a large trading range made up of small corrections and subsequent rises.
For some days, however, the nervousness has been increasing, perhaps because together with the tapering announced by the FED, a new variant has also joined which on the one hand seems more contagious than the Delta, although it seems to involve less serious courses.
What I struggle to understand, however, is the response of the markets. If the concern is the worsening of the disease, why is the “stay at home business” suffering more than the cyclicals in the last period?
Some may say “why these companies that are typically Growth Stocks suffer in a context of rate hikes, as clearly indicated by the FED Funds futures.”
But then why did the US 10-year rate fall back to around 1.4% instead of rising?
The answer may lie in the fact that traders know that next year, the US Treasury will have to place 1.7 trillion US bonds, with the Fed ready to buy only 100 billion. And so they think they will not be able to place them on the market at these rates without the help of the central bank with the consequence of seeing a steepening of the curve.
And if Omicron turns out to be more aggressive than it appears, would monetary policy be confirmed?
How many doubts and how many questions in setting up a correct asset allocation for 2022, after we were surprised by the rise in 2021!
However, if we had adopted an index with equally weighted stocks, the performances would have been much lower, given that the “big one” comes from FAANG and, incredibly, still from TESLA.
Personally I think that being particularly optimistic in this context and these assessments is a bit excessive.
I have seen the forecasts of the major investment banks in the world and they too give a performance target for the end of 2022 of the SP&P 500 on average single digit, while the T bond rate is seen in the area of 2-2.1% (between other, comparing last year’s forecasts with current real levels, it is clear that the estimates for 2021 were much more cautious)
Of course, in the short term the market could also go up a lot. If he did so in the early months of 2000 with the PE at 25 and the T-bond at 6%, there would be nothing scandalous if he repeated even with the current multiples.
The real fear is that the higher the stock market rises, the more it may be vulnerable to corrections, even of moderate intensity. However, it is the credit market which continues to amaze me at how it has stagnated this year, given that the negative performance of bond funds practically depends only on the interest rate effect (which let’s not forget they have already started to rise) with spreads remaining at their lowest or slightly more.
It is enough for us to go and see the ECB study which first calculated the impact that its purchases have had on the curve in recent years and then estimated how much the curves will be able to move, both the government one and the Investment Grade and High Yield one, to make an idea of the situation when they stop buying.
Obviously, expectations are for the “usual” steepening, which is expected in the US, which is more marked in the Corporate sector depending on the rating.
Here because I expect a lot of turbulence on this asset class, which unlike equity has a “capped” return by definition. As a result, I see no reason to keep Corporate Bonds with maturities beyond 2029, with very low nominal and negative real yields in the portfolio.