In little more than 10 years, the financial asset markets had the good fortune to activate a strong distortion by the central banks, characterized mainly by the reduction of interest rates to a minimum and by the repurchase of debt and the provision of money at close range
For those whose experience in the markets is reduced to a decade, let’s say since 2010, the interpretation of their behavior has had a binary sense; that is, it has only been necessary to clarify whether investors are in a risk aversion or risk propensity mode.
It seems to me that such a simplified equation is about to change. The reason is very obvious. There are very relevant new elements.
In little more than 10 years, the financial asset markets, all of them, had the good fortune that a strong distortion was activated by the central banks, characterized mainly by two things: one, the reduction of interest rates to a minimum and two, the repurchase of debt and the provision of money at close range.
The purpose of this position was to avoid a severe depression after the collapse of the financial sector and to promote a rapid recovery.
The return to normality began in 2018, but was cut short by a slowdown in recovery and later by the pandemic. At this last moment, the lax policy was not only maintained but was amplified, let’s say, to its maximum.
For as long as the distortion persisted, the markets worked in tandem. In an earnings environment, investors experienced trend corrections in the same direction in most assets. The behavior was downright binary.
In recent days, after the softening of concerns regarding the most recent disruptive event, we have seen the markets react again towards positive returns.
Oil and other commodity prices, which peaked a couple of weeks ago at the height of risk aversion, have fallen sharply.
For their part, the stock markets show a solid recovery. In three days the NASDAQ index has gained 5.38%, the Standard&Poors 500 has risen 3.70%, likewise, stock markets in Europe and even in emerging markets have recovered.
Are we facing a new moment of propensity for risk? I do not think so. I believe that the circumstances will not make this binary behavior conducive. There is a “new” element for many that resides in the presence of a high inflationary cycle and the authorities raising interest rates.
Yesterday the Open Markets Committee of the Federal Reserve in the United States decided to start a hike cycle by raising the federal funds rate (the benchmark interest rate) by a quarter of a percentage point.
Even more relevant is that in the forecast of the members of said committee, also published on Wednesday, a sustained increase is outlined towards the end of the year of at least one and a half more points, to place the reference rate that until yesterday was between 0 and 0.25% at a level between 1.75 and 2 percent.
The Fed also outlined its intention to start a program to reduce its balance sheet and get rid of or not renew the assets that it has repurchased over the last decade and that total an amount close to 9 trillion dollars.
We are clearly in the process of removing the distortion and attacking inflation. Long-term interest rates reflect it in a better way, in a space of a few days it has had significant increases, from the first of March of half a percentage point in the case of the rate of the 10-year treasury bond.
If the rate environment goes up, and there will not be the fiscal and monetary stimulus that the markets have had in recent years, it is difficult to expect this binary behavior. It seems to me that the rebound in stock markets is only cleaning up the additional correction caused by the invasion of Ukraine.
If the premise is to return to the situation prevailing in January, it must be assumed that the prospect of returns in the debt segment points to losses and that of capital to very poor returns in the indices.
The reading within these segments should be more precise to see which sectors, companies or bonds can benefit in an environment of inflation and rising rates that, as I said, is very new for many.
Be careful about rushing back to betting on the stocks or buying long-dated bonds, continue to give some consideration to liquidity. The process of adjusting to this new “new normal” will surely not be easy.
*Rodolfo Campuzano Meza is CEO of Invex Operadora de Fondos de Inversión.
Twitter: @invexbanco