In episode nine of Delta, Andrew Jackson, Head of Fixed Income at the international business of Federated Hermes, speaks with three colleagues – an economist, a multi-asset specialist and a credit portfolio manager – about today’s unparalleled and perplexing financial landscape.
Central bank and stock market symbiosis
“We are in the longest US expansion in history, says Silvia Dall’Angelo, Senior Economist. “But what this expansion has in duration, it lacks in momentum, as it is also the weakest recovery on record.”
It is an environment in which market sentiment has become finely attuned to central-bank policy. In the past 100 years, the S&P 500 has fallen more than 18% on 19 occasions, with the market taking an average of 280 days to recoup these losses, says Tommaso Mancuso, Head of Multi Asset. But the recovery from the last decline, in late 2018, took only 80 days to recover – the third-fastest rebound in history.
“The market-reaction function to what policymakers are doing has been perfected over the last 10 years,” Mancuso says.
Extreme valuations in fixed income
This risk-on reflex to central-bank support is also evident in the strong performance of fixed-income markets in 2019, as investors traded further down the ratings spectrum in search of returns.
“There are a lot of extremely crowded positions, combined with a lot of uncertainty,” says Fraser Lundie, Head of Credit. “Valuations in parts of the fixed-income market look stretched, and underneath them, there are areas that are even more stretched.
“But then there are pockets that are off-the-charts cheap,” he says
How should investors reason with this exceptional environment? Tune in to Delta.
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