- Selling pressure intensified late last week as central bankers continued to discuss the need to tighten monetary policy in an aggressive fashion in order to tame inflation and has continued into the new week given worsening China COVID trends.
- Concerns around a more aggressive Federal Reserve (Fed) as well as China lockdowns were among the reasons that factored into our decision to downgrade equities to neutral a few weeks ago, to increase fixed income, and to reduce exposure to more economically-sensitive areas of the market, such as small caps, and maintain a more defensive sector posture.
- Although there are many concerns and reasons that led us to advise taking on less portfolio risk, there are also some positive offsets. Perhaps the biggest asset for the market from a contrarian standpoint is the current depressed sentiment.
- Last Friday, we saw the greatest demand for downside market protection in the options market since the depths of the pandemic, as well as the greatest weekly equity fund outflows in a year. Retail sentiment surveys remain near a record low; at the same time market valuations have reset, while earnings have remained resilient. This should help cushion the downside.
- For the market, however, to gain much traction to the upside on a sustained basis, investors will likely need to see the relentless repricing of short-term interest rates abate and have greater confidence that the Fed’s actions will be able to tame inflation without unduly hurting the economy.
- Given the crosscurrents discussed and wide range of potential outcomes, we recommend investors maintain a more neutral risk posture relative to the past two years when the risk/reward was more heavily skewed to the positive side.
Following a sharp rally into the end of last month, global markets have been under pressure for most of April. Global stocks are now off about 8% from their late March high.
Selling pressure intensified late last week as central bankers continued to discuss the need to tighten monetary policy in an aggressive fashion in order to tame inflation. At the start of the year, the market was anticipating the Federal Funds rate to be 0.8% by year end. That moved up to 2.8% last week, which is up from 2.4% at the end of March alone.
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