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Market Updates

February 04, 2022

Market Snapshot: Support for Risk Assets

Loose but Tightening Policy Regime Still Supportive of Risk Assets

  • January’s market correction was partially due to interest rate jitters, as the inflationary backdrop pressured the Federal Reserve to act aggressively. At least four rate hikes are now baked into federal funds futures, with up to eight rises expected by 2024.¹ Even with these expected moves, Fed policy would still be extremely accommodative; based on inflation and growth expectations, the neutral policy rate would be over 6%.²
  • This combination of loose monetary policy and tightening is still a positive environment for risk assets, in our view. The chart below shows that similar periods have seen the S&P 500 return 5.7% per year in excess of cash. Real estate (10.1%) and small cap stocks (6.8%) have also done well in that environment, and bond indexes have slightly outperformed cash. It is when policy overshoots and gets tighter than policy models would suggest that these assets tend to suffer. In these cases, large and small cap stocks and real estate tend to outperform cash by only 0-2%, and bond indexes actually underperform cash.
  • The inflationary backdrop could be a boon to some traditional investment approaches. Since 1946, the cheapest quintile of price to book (as defined by Fama and French)³ has outperformed the most expensive quintile by an average of 8.9% per year in periods when inflation is 6% or higher. These effects are largely considered to be related to the “duration” of equity earnings, as value stocks return more of their value in the near term, while growth stocks tend to be priced on longer-term earnings growth projections and are more sensitive to changes in discount rates. Given that the cap-weighted indexes are dominated by a handful of very large growth names, a re-rating of interest rates or long-term inflation expectations could present a continued opportunity for active management..

 

 

 

1 https://www.bloomberg.com/news/articles/2022-01-10/four-fed-hikes-may-be-just-the-start-as-traders-lift-rate-bets.

2 Based on the median of the Taylor Rule and Balanced Approach, per Haver Analytics.

The views expressed represent the opinions of certain GIM portfolio managers as of February 04, 2022, and are not intended as a recommendation of any security, sector or product, and any security identified herein may or may not have been bought, held and/or sold by GIM-managed portfolios. Any opinions or projections herein are based on information available at the time of publication and may change thereafter. Information obtained from third-party sources is assumed to be reliable, but accuracy is not guaranteed. Future developments (including performance) may differ materially from expectations and projections noted herein due to various risks and uncertainties and changes in underlying assumptions. For institutional and professional investors only; not for retail clients.

The views expressed represent the opinions of certain GIM portfolio managers as of November 12, 2021, and are not intended as a recommendation of any security, sector or product, and any security identified herein may or may not have been bought, held and/or sold by GIM-managed portfolios. Any opinions or projections herein are based on information available at the time of publication and may change thereafter. Information obtained from third-party sources is assumed to be reliable, but accuracy is not guaranteed. Future developments (including performance) may differ materially from expectations and projections noted herein due to various risks and uncertainties and changes in underlying assumptions. For institutional and professional investors only; not for retail clients.