Investors in the market buy into the idea that high inflation lasts longer than desired and forces the Fed and other central banks to try to control by anticipating a rise in interest rates.
As a result of the distortions generated by the ultra-relaxed monetary policies of the last 11 years, we observe the gestation of a rare phenomenon. Stock markets and bonds acted in the same direction.
Apparently this association is breaking up in October. The bond market has become risky and shows few returns due to a possible rise in interest rates that affects the value of debt portfolios; however, the stock market has recovered the losses of September. Is this sustainable? for what is this?
Traditionally, this was not the case, it was considered that yields on bonds and stocks should have a negative correlation; that is, they served as different alternatives to the possible scenarios. When risk was detected in the Stock Market it was common to seek refuge in a position in bonds and vice versa.
However, the policy of repression of interest rates activated after the financial crisis of 2008-2009, and reinforced after the pandemic, led to extraordinary gains in both the bond and equity markets.
In both cases, the large amount of liquidity injected and the permanent downward trend in interest rates created a favorable situation and a happy world for active investors.
Now in October we are seeing different directions in both segments.
On the one hand, high inflation, doubts about its transitory nature and the slight orientation that many central banks seem to have towards a less lax stance in the following months (starting with the Fed tapering that will begin soon) has caused that for the second time interest rates tend to rebound during the year.
Investors in the market buy into the idea that high inflation lasts longer than desired and forces the Federal Reserve and other central banks to try to control by anticipating an interest rate hike that has not happened so far.
The Fed remains in its position, but medium and long-term rates, two years onwards, have risen again vertically. This means a higher risk environment for those who are invested in bonds, and surely lower returns.
While this is happening, the stock markets have resumed the upward trend that they manifested during the summer and that had suffered a severe adjustment (close to 5.0%) in September. Many people could have anticipated that when interest rates rose again, or there was a serious expectation about it, stocks would have a downward adjustment. Why doesn’t it happen?
There are several very sensible explanations. The first is the excessive confidence that the authorities would not endorse a scenario of abrupt losses in the markets.
These same authorities have not given clear signs of changing their position violently. The movement of rates can still be considered as marginal, little harmful towards the economy and irrelevant to change the Fed’s plans.
The second is the same economic recovery manifested in the advances of the employment data, in the pressures in the labor market and above all, in recent days, in the favorable reports that some stations have already made where they show a better advance than expected in profits and in many cases little impact even on their margins due to the current high inflation scenario.
Basically the stagflation scenario (high inflation with low growth) is not the reading that investors make today. Growth is high and issuers can make significant gains in their profits and, in the face of inflation, they claim to have the power to increase their prices.
In the following months, a bond market may coexist where rates rise and yields become narrow, with bags that will continue to have the preference of investors.
My view is that inflation pressures can take hold and there may be times when the rate hike accelerates.
Remember what happened in the first quarter: until the magnitude of the rate hike was considerable, we saw stocks tighten. There is no doubt that weeks of greater volatility in the markets are coming.
* Rodolfo Campuzano Meza is CEO of Invex Operadora de Sociedades de Inversión.
Twitter: @invexbanco
Reference-www.eleconomista.com.mx