Emerging risk of rising interest rates

Abraham George Macron View

The many hesitant US law makers and other world leaders are slowly recognizing and publicly accepting that the incumbent president Donald Trump has lost the election and Joe Biden will be the next US president starting 20th Jan 2021. Looks like the proceedings towards the inauguration of the new president’s term should be now more procedural.

On Mar 23 of this year the Fed announced it would become a buyer of bond ETFs. Actually that day was the bottom in the broader stock market for the year. Since then the markets are up 70%. Off late there has been a stand off between the Democrats and Republicans as to what sort of stimulus can the congress agree on. Stocks moved up yesterday as the uncertainty is being removed and think they will settle for around $700 bio. This is no where closer to Nancy Pelosi’s initial proposal for a $3 trillion stimulus.

For the Democrats to agree on a much smaller and very targeted package- to aid small businesses and extend the federal unemployment subsidy , they must be confident they can get another package done early next year (Green deal agenda). This also indicates that Biden will get the Georgia senate seats. Despite the recent restrictions in certain states, Q4 is looking to be much stronger than many economists have predicted. The Atlanta Fed is projecting 11.2 % annualized growth in Q4, with just a couple of weeks left in the quarter.

Accelerating a bounce back in economic activity is most stimulating for small cap stocks. Why is that? In recessions small cap value stocks has a deeper decline than large cap stocks , but that tends to be followed by an explosive bounce back, and a persistent outperformance for many years. If you look at the performance of the Dow this year the Dow is up 70% but the Russell 2000 is up more than 100%.

The Fed is also expected to decide on monetary policy tomorrow. It was only last week that the ECB announced another $600 bio in QE. If all these are falling into place and they foresee the prospects of another fiscal package early next year, there are chances the Fed will start setting expectations for upside risks to inflation. That will get the markets interested in moving interest rates up. You should know what happens to bonds then.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.