Although current inflation levels are high, long-term inflation expectations remain steady at around 2%, causing the yield curve to invert to levels not seen in decades.
If there was a good time to seek for yield during the last few years, it is now. Since bottoming during the pandemic, bond yields have been rising quite fast.
The stock market is doing well this year, as investors are betting on a quick unwind of the current tightening cycle. But, there are many risks hovering around, particularly that of a recession and of interest rates remaining at high levels for longer than anticipated.
Over the last year, defensive stocks have done very well relative to the broad market. Sectors including Health Care, Utilities and Consumer Staples are among the winners in a market haunted by the fear of a global recession.
With global markets declining and most defensive stocks overvalued, it’s hard to find cheap stocks inside the Consumer Staples, Utilities and Health Care industries.
Historical data points toward increasing odds of recession amid growing inflation numbers, and the current profit projections for 2023 are still very optimistic and sitting on not-so-low valuations.
One of the most puzzling observations reported by academics is that the equity premium comes mostly from overnight returns.
A mix of high-flying and persistent inflation, rising interest rates and increased odds for a global recession has turned markets upside down and reverted most of the gains stocks accumulated after bottoming in March 2020.
The value of assets of exchange-traded funds worldwide has grown markedly over the last 20 years, from $200m to more than $10trn.
One of the most important monetary-policy tools is communication. Managing expectations is a skill that was once widely used by the European Central Bank but it seems to be lacking now.
