Kolanovic Sees Risk Assets Under Pressure ‘Until Fed Cuts Rates’
If you're waiting on a sustained rebound for risk assets (like stocks), you might be waiting for quite a while.
Or at least that's the conclusion one draws when juxtaposing Fed speak, market pricing for policy rates and Monday remarks from JPMorgan analysts including Marko Kolanovic, who said that "in order to have a sustained asset recovery, the Fed would need to start cutting rates."
That's problematic if you're betting on Q4's nascent equity bounce to persist. Because even on the market's
Historically speaking, from negative slopping yield curve to positive slopping yield curve (i.e. cut), asset price tends to fall significantly. Old cliche goes, be careful what you wish for.
i think the causality is opposite, typically only after asset price collapse do fed ease the pedal which cause the positive slopping yield curve.
Your are correct! That’s what I recall happening over the last 45 years.
As our esteemed author wrote in “Burn the Playbook,” a lot of how you view the current situation depends on your perspective. The period from March 2009 to February 2020 may indeed have been an aberration. My perspective dates back to late 60s, and 5% rates seem more reasonable than outlandish. And in the broader context of Western capitalism, 5% is still on the low side. Until recently the idea that investors would buy government bonds at negative interest rates was unthinkable. And being driven out the yield curve and down the credit ladder to get income hasn’t been very palatable. Now that inflation has popped, rates need to go back to “normal” (from a long term perspective) and stocks must be repriced accordingly. Of course, as our author points out, markets may break in the process and repricing may turn chaotic. We all hope that doesn’t happen, but 5% in itself doesn’t seem like an outlandish goal.
It could easily be years until inflation is down to 2%
No one knows for sure, including Jerome.
Stepping back, it’s commonly stated that earnings drive share prices. That assumption underpins many of the forecasts our Dear Leader has been sharing with us.
But over what time periods does the correlation hold? Quarters? Years? Market cycles? If the time period covers years, how useful are they when it comes to forecasting equity price movements over the next six months?
As well … is the correlation CAUSAL or reflective? So many of the models investors and the Fed rely upon may well be built on foundations of sand.
Not that most strategists would care to even countenance this observation from some old crank.
Good morning, Derek. Your crankiness is valuable, and you’re not the only market aficionado to question and complain. Notwithstanding the cold water being splashed on the economy the Fed, this too shall pass.
I am expecting that investments I make during this downcycle will yield real earnings after the slop washes downstream. I’m not saying I can take it to the bank when I wish it to be so. But I’m here to gain a return and invest in good companies with realistic plans for success. In the meantime, anything can happen. Who knows. Putin may invade Europe. But I don’t expect it. The dust will settle at some point, and I hope to capitalize when that occurs.
My first real (grad) finance prof had a saying that applies here (IMHO); “Something is always better than nothing and if you can’t make 6% on your money, drink it (apologies). Even if there are no positive reals, 6% >4% and 8% > 6%. When I can get a higher current income, even at a negative real level, given level(ish) risks, I’ll take it. Right now one of the best things I own is a biggish amount of Vanguard’s TIPs fund (VAIPX) yielding 8.3%. The income I get from this one position is equal to my SS payment. The price is below my basis but a loss is only a loss if you take it. I won’t do that.
Interesting. I don’t know what the weather will be over the winter. But I can pretty well guess it will be cold here in Chicago, and it will warm in the spring. I’m an older guy, and I should be attracted to a Vanguard fund with such a yield, but I don’t like going that route.
How we perceive risk varies. Some are conservative. My perception of risk is based on a life-experience of recessions (which is not necessarily saying much). I’ll hold BAC or VZ, but at the same time I consider other choices when stocks are underwater.
I believe if I invest in a young company that’s growing its earnings but has been unnecessarily beaten down due to macro issues, it can yield returns, depending on the business come springtime. Of course, there’s also a swath of variables to consider and evaluate in these investments.
I’m no swami. I pay the price of patience, not interest. And the returns are usually multiples of two, three, or more on the initial investment for small caps. That’s just reality. I’m still kicking and finding opportunities. Not for the cautious. Can’t worry about it.
I did that stuff 30 years ago. I’ll be 80 soon and I’ve got no time for young companies any more. I go for income and give 25% of it to those in need. That’s a luxury I’m glad to have. In the last 13 years I’ve given away the equivalent of all the money my wife and I made in the first 30 years of our life together. When I can make 8% with virtually no risk, I’ll do it. BTW, born on Ontario Street in the early 1940’s. The hospital charged my mom $3 a day for herself and 50 cents for me. My dad was on Guam and I didn’t see him until after the war. When he came in the door at my grandparent’s house I spoke my first words, “Hello father, we’re glad you are home.”