Stocks fell last week as concerns grew about the effect the Federal Reserve’s tighter monetary policy would have on the markets.
Stocks are having to deal with multiple issues at once:
1. Interest rates have been increasing. The 10-year real rate is now back to 0%, its pre-pandemic level. This has hit the beneficiaries of low real rates, such as $XLK, $TLT and $BTC .
2. Inflation expectations are at risk of becoming de-anchored. The closely-watched 5y5y inflation swap rate is now 2.44% in Europe and 2.83% in the US. Both are well above the 2% inflation target. This is putting pressure on central banks to tighten policy further.
3. Russia and Ukraine seem to be moving further away from a diplomatic solution.
4. COVID lockdowns in China are intensifying, while the property market there continues to slow down.
“It is hard to find good news anywhere and I can find good reasons to be negative on almost every asset class,” says Neil Birrell, chief investment officer at Premier Miton Investors.
We believe there is scope for a 10% sell-off to below 4000 on the $SPX500 index as the narrative pendulum swings further towards negativity.
A sell-off would present a good buying opportunity, though, in our view. We believe the economy, particularly manufacturing, will slow down significantly this year.
But we also believe that strength in the services sector means a recession will be avoided.
We are keeping our positioning defensive for the time being but would increase risk by buying beaten-down cyclical stocks if a further sell-off were to occur.
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