Markets at critical levels
Abraham George Market Musings
We are a few days away from the Fed’s first meeting of the year. A lot has happened in the bond markets since the last meeting which was a month ago. The 10-year yield moved up from 1.45% to 1.90 % which is a significant move for a month but has now settled lower from its highs. This has caused a slide in stock markets. The rates up scenario create lower valuation especially for the high growth stocks with no EPS.
With that, the NASDAQ corrected almost 10 pct as of yesterday from its recent highs. Will the Fed which has always reacted to excessive downside volatility change their mind at this stage. This is a question on the mind of every serious stock market investor.
Let’s juxtapose this against the last time when a similar situation arose and guidance was given from the Fed. The Fed began a rate liftoff in Dec 2015 with the guidance of four rate hikes through 2016. The market’s negative response was so strong that in two days the markets were down by 13%. Within a month, they abandoned their plans for any further hikes and calmed the markets. So, will the Fed do the same thing now? The short answer is no. The policy error the Fed made back then was acting too soon. The policy error that the Fed will be making now is acting too late.
What is likely to happen now? As we progress through the year, there could be a lot of sectoral rotation. Financials and energy should do better at the expense of growth stocks. Growth stocks with good cash flows should continue to hold up. Commodities have never been this cheap in the last 12 years and relative to stocks it is almost at a 50 year low.
Yesterday’s trading in the US session gave mixed signals to the markets. After the sharp sell-off, the markets were looking to rally when the Fed released its report on a digital dollar. When the report hit the markets, the cryptos took south in unison and so did the stock markets.
What is clear from the digital dollar report (CBDC) is that the central bank will retain strong control of their currencies. We had written extensively on this in our past reports. The central banks will take measures to thwart the importance of private currencies too. In the US, Senator Elizabeth Warren will continue to play a major role in bringing this to the attention of Congress. The BIS (Bank for International Settlements) consists of 63 global central banks and nearly 90% of them are having discussions about adopting a CBDC.
This is all part of the “Build Back Better” agenda of the present US Administration as opposed to “Make America Great Again” by the previous Trump administration. The global clean energy agenda plays a bigger role though.
As for markets, yesterday’s price action has done some serious damage. While the S&P 500 is testing the 200-day moving average the Nasdaq has already gone below it. My hunch is we should hold these levels to build back up but much will depend on the Fed action. The Fed is unlikely to be reactive and will press on with what they have already communicated.
Should there be more pain in the stock markets, we are more likely to see a fiscal response.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund. Currently, he is setting up a hedge fund where foreign citizens can invest in Indian growth stocks like Tanla operating in hyper-growth markets like CPaaS.