Fear rising | Financial Times


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Good morning.I was expecting an email that Ethan dislikes Measured defense Of yesterday Jay Powell. I didn’t get anything. Do all our readers sympathize with the Chairman of the Federal Reserve Board as well? Or did we conclude that we are hopeless when it comes to inflation? Send us an email: robert.armstrong@ft.com When ethan.wu@ft.com

Take the risk! This time with real numbers!

August, Unhedged Market fear As leverage declined, defense stocks were strengthened and high-yield spreads widened Sumizin. And it didn’t happen much. September was a weak month for stocks, giving up almost 5% and October was the best month of the year.

So when we say again that fear can sneak up on financial markets again, we do so carefully. We have been fooled before. But there is a duty. The first place to look is the S & P 500, which has fallen apart over the past week or so as benchmarks try to recover.

Some sell-side types are nervous about the big picture. All Bank of America strategists have to say about next year is a shorthand on Staccato Wall Street.

“We are bearish in the market. The ’21’inflation shock’and the ’20’growth shock’ are followed by the ’22’rate shock’; the financial position set to be tightened by WallSt and / or policy measures. . Asset prices driven by rates and profits .. .. ’22 Rise at short rates. .. EPS slows sharply.

“Our forecast for 22 years is low / negative and volatile asset returns after 18 months of fat (late bubbling) returns on cryptocurrencies, credits and US equities.”

Elsewhere, BNP Paribas has discovered volatile behavior in the forex market as investors work on safe currencies such as the Swiss franc, yen and dollar. Last week, the yen’s net short position fell to almost neutral, but long bets on the dollar and franc were extended:

Other signs of fear:

  • Vix is ​​the highest for 9 months. VVix, which measures expected Vix readings over 30 days, is also skyrocketing.

  • As for small-cap stocks, Russell 2000 has fallen 11.6% since early November, and a large amount of trading has been carried out.

  • Junk bonds, on the other hand, are being put up for sale as market colleagues due to Omicron concerns. Joe Renison Recorded in FT yesterday. High yield spreads rose about 0.5 percentage points in November, with outflows at their highest levels this year.

Not everything is fear and disgust. Citi’s Panic / Euphoria Index is still honestly located in the Euphoria territory. Margin debt, an indicator of risk cravings, has returned to record highs (although the latest data is from October). The yield curve is partially flattened, but still far from reversing.

The obvious cause is Omicron, but the simple fact that the coronavirus variant has made a lot of money in a long bull market, with a decline in fiscal stimulus, a more hawkish FRB, slower earnings growth. Arrived when it was already overhanging from. December is usually a good month for stocks, but it’s set to be bumpy.

Then again, the setup was similar in August — delta variants, imminent tapering — and no Unhedged warnings happened. Expect repetition. ((((Ethan Wu).

Growth, value and rate, reduction

A few days ago, no hedge Touched It is based on the general knowledge that when interest rates rise, growth stocks fall below value stocks. Through the math of discounts, the idea is that higher rates will have a big impact on long-term assets (higher value assets in the future). He pointed out that this notable correlation seems to have collapsed a bit lately as yields on 10-year Treasuries have risen and are outpacing growth anyway.

Many readers have sent emails about this. One prominent correspondent pointed out that the recent collapse of relationships is less serious when comparing growth / value performance to the Treasury for 30 years instead of 10 years, given the protracted growth stocks. He sent this chart:

It’s been a bit off for the last few weeks, but of course, looking back, there’s a bigger difference. Other readers have suggested using the actual yield as a comparator. Again, this has recently shown a tighter match. However, the problem of major historical differences remains.

Sean Markowicz of Schroders’ strategic research sent some fines jobs He was following this relationship and found that:

“Not the experience of the last three years [during which value has outperformed when real rates rose] It was a typical one, and it was actually an outlier. In the three years since the 1990s, there has never been such a high correlation. “

Here is a chart of Markowicz’s work, shown in yellow for the last decade.

In many of the 90’s and early Aughts, the higher the rate, the lower the relative value return. Markowicz argues that real interest rates alone do not provide important information about expected growth and inflation, nor risk needs, that influence expectations for future profits.

He makes another interesting observation: what kind of stocks are worth and the growth index changes over time. Value and growth are basically the difference between cheap and expensive. However, it is often treated as if it completely overlaps with cyclical anti-defensive. But that’s not the case. In some market regimes, circulating stocks are expensive and many of them end up in a growth index. For example, ask yourself. Are semiconductor stocks growing or worthwhile? The answer is that it depends. But they are always cyclical. Markowicz summarizes, “Currently, there is a strong cyclic bias in value, but history suggests that this exposure may decline in the future.”

Edward Finley, a professor of finance at the University of Virginia and a regular correspondent, points out that how value stocks react to changes in interest rates depends on how they change. bottom. in general Corresponds to rates, which are relationships that have changed significantly over time. Prior to the 1990s, equities and bonds were positively correlated (thus, as equities rose, bond yields fell). He explains:

“Until the 90s, investors were less confident in the Fed’s ability to curb inflation. As a result, inflation expectations pushed up all asset prices and created a positive correlation between equity and bond returns. Growth expectations dominated asset prices as investors gained confidence in the Fed [and] The correlation between stocks and bonds has become negative. The point here is that I don’t think we can draw a conclusion about the relationship between interest rates and growth equity without first clarifying the relationship between interest rates and all equity (which seems far from linear to me). is).

Predicting interest rate paths is not enough to predict whether value or growth stocks will outperform. Both real and nominal interest rate forecasts, or even implicit inflation expectations, are not sufficient. Factors such as growth expectations, changes in the risk premium, and index composition are also involved. Investing is difficult.

One good reading

NS Great work From The Wall Street Journal’s GregIp on Covid’s trade-offs. Yes, the blue states are more cautious about Covid, and as a result, they are less likely to suffer from illness or death. However, the lack of attention of the Red States seems to have resulted in higher economic activity and higher employment.

FT asset management — The inside story of movers and shakers behind the trillion-dollar industry.sign up here

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