Most risk assets have had a decent fall this year. Long overdue and somewhat predictable perhaps but as ever it’s the most popular stocks and styles that have been hit hardest.

Along with the Ukraine invasion and continued Covid induced lock downs in Asia, the rise in the US 10 year note yield has been responsible for this reappraisal of risk.

The US 10 year note yield is fast approaching 3% and the whole curve has occasionally inverted which to some ‘scribblers’ portends a recession. To put this rise in perspective the US 10 year note yield was 0.5% in July 2020 and started this year at about 1.6%. That’s quite a loss of capital given the long duration at such low yields. Over that same 21-month period, US equities are up about 30%! Too late, the ‘inflation is transitory’ narrative has been removed, and we now perhaps have a more aggressive tightening to endure than we would have had if action had been taken sooner? “A stitch in time saves nine” is a useful refrain to remember.

We have been told that ‘tightening’ is an imminent rise of 50 basis points in the Fed Funds rate (the short end) but also need to bear in mind that the size of the Fed balance sheet is going to be reduced. This represents an additional source of tighter monetary policy and so the effective tightening of policy is greater and quicker than most realise. This has consequences for the kinds of risk factors one should favour; put another way a different kind of stock will do better in the next five years than in the last 10. The 30% rise of US equities compared with a 15+% fall in the value of ‘safe’ government fixed income is unlikely to continue.

We call it investing in stocks that meet needs rather than wants.

Other posts

NDR Dynamic Allocation Strategy October 2023 Update

Dynamic Allocation Strategy, indicators, weightings update Read more →

C8 Weekly Bulletin:  Trendrating on US Bank Stocks

C8 Technologies are delighted to announce that Trendrating will be adding 7 US and European equity indices to C8 Studio. They have been working with investors over the past 10 years to enhance equity portfolios, using a proprietary methodology which focuses on determining the ongoing trend in individual equities. Trendrating have just produced a timely report on US bank stocks which they have kindly allowed C8 to share. This illustrates that, whilst the Silicon Valley Bank failure had idiosyncratic issues, investors perceive a much wider problem with smaller US banks.  Read more →

NDR Dynamic Allocation Strategy February 2023 Update

Dynamic Allocation Strategy, indicators, weightings update Read more →
Back to all posts →