April 22, 2022
Good morning,
Equities were making some nice gains earlier this week on what appeared to be some solid earnings releases. However, this week’s gains were all given back yesterday as rates resumed their ascent. A seesaw few days – aka a trendless tape.
Overnight, Asian equities passed the risk-off baton to European stocks as they trade lower on the day presently. The global weakness in equities looks to have started at yesterday’s IMF-hosted panel discussion in Washington where Jerome Powell outlined his most aggressive approach to taming inflation to date, potentially endorsing two or more half percentage-point interest-rate increases while describing the labor market as overheated.
Most central banks around the world are raising interest rates. Historically, that has been a hurdle for equities. All the net gains in world stocks since 1989 have hypothetically been in the period where the majority of world central banks were easing rates.
While the Fed has only raised rates once, by a minuscule 0.25%, other rates in the U.S. are now at levels that have historically been a problem for the stock market when you compare interest rates to stock earnings yields.
I think keeping a portfolio aligned with the prevailing trend of the market is critical to risk management and performance. In March there appeared to be sufficient evidence of a trend change and deeply oversold tape signals. I think we’ve given the bull trend enough benefit of the doubt, and the tape time to work off its oversold condition to change equity portfolio allocations in taxable accounts from overweight to marketweight. This puts taxable portfolios in line with a neutral or trendless tape.
Be well,
Mike