While the monetary easing cycle is underway, many investors are waiting. They want to confirm whether a soft landing will be achieved, as the Federal Reserve (Fed) claims and seems to be happening so far, or whether a recession is ultimately inevitable. Economic conditions and market dynamics suggest all is well, but some analysts are wary of rising bonds. Debt makes them wonder if everything is in order and They look for signs of weakness that can explain the behavior of fixed income securities.
“It’s the dream situation for any bubble: the Fed collapses, oil flows and China stimulates. The only thing that makes me doubt is the bet on long-term bonds and the possibility that the stimuli “In this case, geopolitical risks would skyrocket,” said Bank of America (BofA) analysts led by Michael Hartnett.
This context, where central banks are pulling the wagon, has given investors wings to continue investing in stocks. In fact, global stock market capitalization is on track to surpass the 2021 record, when its value reached 123 billion dollars (trillion), according to BofA data.
The market is buying the tailwinds: the scenario of a soft landing, a “giant reduction” from the Fed (50 basis points) and the injection from China. With these allies, the logic is that there will be increases and this is the premise for investors to continue to be optimistic. The climate is enjoy the present moment and live off your income stimulus from the Fed and China, explains the same analysis.
However, at a time when everything is going so well, risks are starting to emerge. “I’m so bullish, I’m bearish,” the report quips. If the stock market goes up without stopping, it is logical to think that obstacles may arise. This is why investors also offset their portfolio by taking refuge in gold or bonds.
The entity’s analysis is the context it sees after Wall Street’s all-time highs. The S&P 500 has renewed its record 42 times this year. The rest of the indices (Dow Jones and Nasdaq 100), if not at levels never seen before, are stuck to them. At the same time, gold is hitting all-time highs and bonds are rising. “Let’s keep doing this until something stops us,” Harnett and his team of analysts once again quip.
But all that glitters is not gold. The entity sees several buts or risks when examining the stock market in more detail. 43% of the S&P 500 market capitalization is under investigation by the Department of Justice or the Federal Trade Commission (FTC). This is the case for Nvidia, Amazon, Meta, Alphabet, Tesla, JP Morgan, Unitedhealth, Visa, Mastercard, Walmart, Adobe, Coca-Cola and Pepsico, among others. Additionally, another sign that raises doubt is how some results are cited that are dire, but are rated with Buys.
What is the reason for the appetite for bonds?
Beyond these two examples, BofA believes that there is a complex macroeconomic context and this is what the bonds reflect. From their perspective, the underlying inflationary trends of 2020 remain in force: increased government spending, monetary and fiscal policies, geopolitical isolation, wars or an aging population. All these problems generate this contradiction in debt and push investors to enter not only the stock market, but also bonds. The ten-year yield is at its lowest level in 62 years, implying that There is an appetite for fixed income given doubts about the future.
Finally, they consider that there is another factor that can ruin this dream, namely the possibility that the Chinese stimulus measures will not work. Massive stimulus measures can end a recession, but the plan must come to fruition and be effective.
“Stock markets are expecting a soft landing, but investors should not ignore the signals from bonds that point to an imminent recession,” agrees Lisa Shalett, head of investments at Morgan Stanley, in her diagnosis. “Stocks and bonds seem to be sending mixed signals about the direction of the economy,” he adds.
The entity also explains that these expectations of a soft landing are taken into account. Although it is considered the base case, warnings from Treasury bonds are also “taken seriously.” According to his analysis, Negative surprises could arise on three fronts. The economy is fragile and this could undermine the confidence of families, reducing their consumption. Another area of ​​concern is small businesses, which make up two-thirds of the U.S. workforce. Their sales expectations are low, which means they are cutting back on capital spending and hiring. In addition, little by little, inflation has eaten away at savings, which means more stress for families.
Yield curve divestment
“Inverted yield curves generally do not invert when downturns occur because investors expect the Fed to cut its overnight interest rate to support the economy. Current expectations for reduction are associated with a Fed that is behind the curve,” he explains. Recently, ten-year US bonds have returned to a higher yield than the two-year benchmark. The curve, which had reversed with the restrictive cycle, has now normalized.
Mark Spitznagel, chief investment officer of Universa Investments, also says that once the curve reverses, the clock starts to tick. [hasta una recesión]. But the strategist goes further: “The black swans are always on the lookout and now we are on their territory,” he emphasizes on television. Bloomberg. He shares the view that stock markets are rising sharply and suggests that there is a need to set a cap. According to him, this will happen before the end of the year. Like his colleagues, he calls for caution.
