The Fed is finally taking stocks off the wealth allocation throne

(Bloomberg) — For years, asset allocators have been easy: Buy America’s biggest tech companies and watch profits grow.

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Those days are gone, buried under a series of central bank rate hikes that are rewriting the playbook for investment managers across Wall Street. TINA – the mantra that investors have no alternative stocks – has given way to a whole spectrum of real options. From money market funds to short-term bonds and floating-rate bonds, investors are now locking in low-risk returns that, in some cases, exceed 4%.

The shift has been underway since the summer, but accelerated in September as investors accepted that inflation data was still hot and a tightening labor market would force the Fed to lock in interest rates at all-time highs. since the housing crisis. Following Chairman Jerome Powell’s comments on Wednesday, there is little doubt that the central bank expects at least a mild recession to rein in inflation.

“We’ve passed the inflection point where bonds provide more value than stocks, thanks to valuations and the delivery of massive interest rate hikes, and the return of the inflation risk premium in the bond market. Trading macro strategy at Mizuho International Plc. “We expect the downside risk to earnings will make that equity risk premium even less generous in the coming months.”

Unwilling to risk cash in a stock market that is in some ways turning more violently than at any point since at least 1997. Instead, investors are settling for The two-year bond has the highest yield since 2007. The one-year bond pays close to , and while both are tracking the latest inflation metrics, it still outperforms 20% in this year’s S&P 500.

All told, fixed income is delivering the biggest bonus compared to stocks in over a decade. Investors have poured record amounts of money into short-term exchange-traded funds, while a record 62% of global fund managers have excess cash, according to a Bank of America survey. They have also reduced their exposure to equities to an all-time low.

“Cash and short-term fixed income increasingly offer lower volatility and high yields in cross-asset portfolios,” Morgan Stanley chief cross-asset strategist Andrew Sheets wrote in a note. The new appeal of those alternatives is one reason he recommends the stock credit.

The shift is increasingly evident in the inflows and outflows of funds. Government bond ETFs attracted more cash flow in September than their stock counterparts in just the second instance in three years. State bonds now account for 22% of all ETFs and mutual fund purchases over the past year, while allocations to equities now represent just 2% during that time, according to Deutsche Bank AG.

The foundations of the post-pandemic rally – ultra-low interest rates and monetary stimulus – have collapsed. Instead, rising borrowing costs and tighter financial conditions have forced investors to hold on to cash.

That is evident even among those willing to participate in the stock market. They are favoring companies with strong balance sheets and high dividend yields. Cash-rich companies continue to see strong capital inflows, taking the Pacer US Cash Cows 100 ETF, which only saw positive monthly cash flows in 2022 totaling $6.7 billion la up to the present time. Companies with steady income streams also remain attractive to investors with the $36 billion Schwab US Dividends ETF receiving $10.6 billion in cash so far this year.

The Fed’s aggressive hawkish attitude has increased the risk of a recession and reduced the odds of a soft landing. That opens the door for longer-maturity bonds to also become more attractive soon, especially if the Fed shows signs of slowing down its tightening pace.

“As interest rates peak, it makes sense to move along the maturity curve in anticipation of lower bond yields,” said Chris Iggo, chief investment officer for core investments at AXA Investment Managers. .

For HSBC’s chief multi-asset strategist Max Kettner, short-term bonds have turned out to be a better option than equities but the clear shift from inflation worries to growth concerns will be the cause. leading to an even broader shift to fixed income. Now, HSBC’s strategy team led by Kettner has moved into a larger overweight position in terms of cash and cut its equity weighting to its maximum shortfall in August.

Even the “you only live once” day-trading crowd could not profit from any stock drop.

“We are definitely seeing a regime change,” Kettner said. “The TINA and YOLO worlds of 2020/21 have essentially come to an abrupt halt due to a combination of slower growth and higher inflation.”

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