In part he says, "We expect markets will likely react with volatility in the bond and stock markets whether the Fed changes or does not change their balance sheet activity and dot plot for rates forecast.
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"We need to see more synchronization in factor returns to feel confident about the current uptrend continuing. We believe that the cyclical rotation and rapidly rising rates will last another month or two, then the boat will steady itself, and the world (in almost all things) will return to normal."
The Market And COVID-19
The Fed meeting concludes today, and our expectations are for no action on rates or change in balance sheet activity. We are expecting an updated rate forecast and employment forecast to be released showing slightly more hawkish Fed expectations on the dot plot for rates, as well as continued improvement in their employment outlook.
We expect markets will likely react with volatility in the bond and stock markets whether the Fed changes or does not change their balance sheet activity and dot plot for rates forecast. Powell will have to walk a very tight line during the press conference.
Since Covid lockdowns began a year ago, the market has been a seesaw of growth and reopening trades. We do not believe the market can be truly healthy and normalized if this phenomenon continues to occur. We liken it to a boat violently rocking back and forth that needs stabilization—we need to see more synchronization in factor returns to feel confident about the current uptrend continuing. We think the market is searching for something to take negatively in a sea of green shoots, and the rapidly rising 10-year is the most obvious one on which to focus. If we look a little closer, however, the 10-year yield is just now hitting the underside of levels we were at pre-covid representing an asset class that took a longer amount of time to normalize.
Yields Will Continue To Rise
Going forward, we know the narrative is that with the amount of money supply growth inflation will take hold and yields will just continue to rise. However, we think the rate of change is just as important as the trajectory, if not more so.
Now that we are entering areas of pre-covid rate levels we expect the rate of the rise to slow down profusely. While we will see revenge spending in some areas of our economy, it should be relatively short-lived, and while handing out money is nice, that is not what creates long-term inflation.
This country still has an employment and productivity issue, and the massive investment into technology will continue to create efficiencies that should help with long-term inflation rates. We believe the better question is why wouldn’t rates return to pre-covid levels?
Cyclical Rotation And Rising Rates
Why is everyone so shocked? As we have stated before, the Fed cannot afford to let rates rise too much, and we do not believe they will hesitate to institute some sort of yield curve control if the rapid rate of the rise continues.
We believe the reopening trade is getting a little overdone but for a specific reason—a lot of the major momentum strategies and ETFs will be rebalancing in the next month or two, and if nothing changes they will be switching from a predominantly tech portfolio to more cyclical holdings—funds know they will have a ready and willing buyer to sell to at any price.
Because of this, we believe that the cyclical rotation and rapidly rising rates will last another month or two, then the boat will steady itself, and the world (in almost all things) will return to normal.
Article by Brett F. Ewing, Chief Market Strategist - First Franklin Financial Services
Disclosures: Securities and advisory services offered through Centaurus Financial, Inc., member FINRA and SIPC, a registered investment advisor. Centaurus Financial, Inc. and First Franklin Financial Services are not affiliated companies. This presentation is for educational purposes only and is not intended for investment advice or a solicitation of services.