TO SELL on rumor not news. Last week was the best in more than a year for stock investors despite rising US interest rates, Covid lockdowns in China and continued misery in Ukraine.
Investors prefer to know, even if the headlines are bad. It’s uncertainty, we can’t take it.
The Ukrainian round trip
Stock markets are moving fast to assess news. The Stoxx 600 index which tracks European stocks fell 10% between the invasion of Ukraine and March 7. Over the past two weeks, stocks have recouped all of their losses. Even in Germany, the most misplaced of all thanks to its heavy dependence on Russian energy. There is no doubt the economic hit will be severe – Goldman Sachs thinks growth will drop from 4% to 2.5% – but investors are looking through a glass half full towards more EU cohesion and spending higher defenses in the years to come.
The Fed is starting, but will it end?
The quarter-point rise in US interest rates last week came as no surprise. And the Fed has made it clear that this is the first tranche of a prolonged tightening cycle with perhaps six hikes in total this year. But others doubt he can deliver. Former Pimco “bond king” Bill Gross believes the Fed will stop tightening when it becomes clear that higher rates will slow the US economy and, in particular, its housing market. If that means higher inflation but lower yields, the biggest loser in this environment will be the bond market.
What to do with your fixed income?
If bonds are hit by the new stagflation, what is the outlook for balanced portfolios? Simple stock/bond combinations may have had their day. But it is okay. A diversified portfolio with growth and value stocks, inflation-linked bonds, cash, commodities, gold, and even bitcoin seems like it could offer an even smoother ride than the traditional 60:40 mix. , based on figures from the US branch of Fidelity.
The end of the Chinese crisis?
All it took was a few soothing words from Vice Premier Liu He to turn the tide in Shanghai and Shenzhen. The two-way moves last week for Chinese equities were heartbreaking, but we may have experienced the darkest hour for the Chinese stock market. Easing of Covid restrictions in Hong Kong could pave way for end to discredited Zero Covid policy; a market-friendly recovery appears to be on the way; and China discusses with the United States the resolution of the impasse on Chinese stocks listed in the United States.
The opposite case of cheaper oil
Everyone accepts that the price of oil remains high for now. Well, not Citi’s commodity team. They think Brent will be at $60 by the end of the year due to: less demand than expected; Russian sanctions having less impact on oil supply than feared; a ramp-up of Shale production in the United States; and forgotten producers like Venezuela and even Iran are returning to the market.
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